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HP Reports First Quarter 2012 Results

HP today announced financial results for its first fiscal quarter ended January 31, 2012. For the quarter, net revenue of $30.0 billion was down 7% from the prior-year period, and down 8% when adjusted for the effects of currency.

 

- First quarter non-GAAP diluted earnings per share of $0.92, down 32% from the prior-year period and above previously provided outlook of $0.83 to $0.86 per share

- First quarter GAAP diluted earnings per share of $0.73, down 38% from the prior-year period and above previously provided outlook of $0.61 to $0.64 per share

- First quarter net revenue of $30.0 billion, down 7% from the prior-year period

- Returned $1.0 billion in cash to shareholders in the form of dividends and share repurchases

 

(Editor's note:Read the full announcement at the HP Newsroom)

 

Transcript: Meg Whitman's prepared remarks during 2pm PT investor call:

Since I spoke with you last, I’ve spent a great deal of time with our employees, our customers, partners and investors.

 

Given some of the challenges of the last year, we’ve been working hard to set the right tone, calm the waters, and reassure our stakeholders that HP is the same reliable company that they’ve known and admired for decades.

 

I’ve visited HP offices, hosting roundtables and employee meetings in Palo Alto, Cupertino, London, Vienna, Chicago, Houston, Herndon and Alpharetta, Georgia.  I’ve spent time with the sales force, communicated regularly with our senior leadership, and worked very closely across the executive team. I’ve been with our customers.

 

At HP Discover in Vienna, we brought together more than 7,000 of our top enterprise customers in the biggest event in HP history.  And I’ve participated in more than 80 customer visits, meetings and conversations.  I’ve engaged with the channel through partner meetings, roundtables, interviews and just last week at the first ever HP Global Partner Conference.

 

So what have I found? Certainly, I’ve found some skepticism, but I have also found that we have incredible support: people who believe in HP, people who want us to win, people who want to work with us and build for the future. 

 

And every day, I learn something new about a technology, an innovation, a solution.  Often, just a story about the role HP has played in someone’s life or a customer’s success.  It’s inspiring.  The more time I spend listening and learning, the more committed and passionate I become.

 

I’ve also gotten to know many of you, our investors. And just as I have with other stakeholders, I’m working hard to strengthen our clarity and transparency. I want you to understand where we’re taking HP and why. 

 

Most of all, I want to set HP on a path to continue to meet and exceed our expectations for the long term. I believe we’ve started on that journey during the past few months, but we have a long road ahead of us.

 

Back in November, we set the outlook. We said that we had a lot of work to do.

 

And we detailed the headwinds that were likely to pressure our business in 2012, including a hard drive shortage and an uncertain macro-economic environment.  In Q1, I think our performance, by-and-large, tracked pretty closely to those expectations.

 

The headwinds we discussed did impact performance, contributing to a decline in revenues, operating margins, cash flows and earnings year-over-year.

 

That said, we met our guidance and delivered non-GAAP diluted earnings per share of $.92 on revenue of $30 billion.

 

Frankly, it was a tough quarter and every business had its challenges.

 

In PSG, the hard drive shortage and continuing difficulties in China contributed to a revenue decline of 15% year-over-year.  With the supply challenges, we focused on profitability rather than share, and did a good job delivering an operating margin of 5.2%.

 

PSG is important to HP.  It gives us great return on invested capital and a lot of synergies.  During the quarter, we also saw PSG returning to its roots as an innovation leader.

 

With the introduction of the Spectre ultra-book, HP won a prestigious “Best of Show” at the Consumer Electronics Show in Las Vegas a few weeks ago.  We need more of that.  We need to keep driving innovation that generates desire and demand with our customers.

 

The fact is that for all that’s right with PSG, we underinvested in innovation for the last several years, and we’ve been late to market too often.  We have to lead again.

 

In Imaging and Printing, year-over-year revenues decreased 7% with declines in supplies and hardware, in consumer and commercial, and operating margin declined to 12.2%.  All of you know, IPG has been the lifeblood of our company for a long time, with great margins and very resilient revenues.

 

And IPG is still a great HP business: the undisputed leader in the printing and imaging industry, and well positioned to capture the shift from analog to digital. But we also have to recognize that the business is being pressured on multiple fronts.

 

And revenues from our adjacent businesses, like commercial digital print, are doing quite well, but not developing fast enough to replace the revenues we’ve been losing.

 

We have work to do here and are aggressively exploring ways to build on IPG’s leadership given the realities of today’s marketplace. 

 

In ESSN, revenue declined 10% and operating margin fell to 11.2% year-over-year. Industry Standard Servers revenue was down in a highly competitive environment that was compounded by the hard disk shortage.

 

Business Critical Systems revenues also declined, as we continue to address the Oracle-Itanium situation.

 

3PAR delivered another terrific quarter, but in our broader storage business, we’re still working through a product transition.

 

And our Networking business remains well positioned in a high margin category.  Although the overall market was challenging, we’re really excited about some of the innovations we’re bringing to our customers. 

 

We’ve launched some great new products like the Proliant Gen8, the industry’s most self-sufficient line of servers.  We believe that this is just the type of game changing innovation that can help us regain our momentum in the category.

 

In Services, year-over-year revenues were up 1% while operating margin declined to 10.5%. This continuing margin pressure in Services really goes straight to a couple of our major challenges, like resource utilization and business mix.

 

We’re focused on transitioning to more profitable services, while enhancing our systems, processes and sales force.  Last quarter, we characterized Services as a long-term effort. That journey continues.

 

In Software, with the addition of Autonomy, revenue grew 30% year-over-year with a 17.1% operating margin. The Autonomy acquisition is going well.

 

And we’re continuing to grow our strong set of assets from information management to our IT Performance Suite, including security, management of hybrid clouds and application lifecycle management.

 

Software is a critical part of our portfolio and of our forward-looking strategy.  It amplifies, differentiates, optimizes and secures our core infrastructure, builds on our solutions capabilities and expands customer relationships.

 

For example, with an asset like Autonomy, we see potential synergies across the entire portfolio in IPG, ESSN, Services and in other software assets like security.

 

From a macro economic standpoint, we’re seeing an uncertain environment.  In the US, there are some signs of economic improvement, but we’re still experiencing a weak consumer market and commercial customers who are investing cautiously.

 

In Europe, the Middle East and Africa, and APJ conditions are mixed.  We remain guarded about Europe, but some of the larger economies do seem to be stabilizing.

 

When we last spoke at the end of Q4, I’d been CEO of HP for about 8 weeks.  Now, coming out of Q1, it’s closer to six months, and my perceptions of the business have evolved in that time.

 

Some of that has to do the external environment, but I also have a clearer picture of the work we need to do on our business.

 

In my mind, I put the issues in three buckets.

 

First is fixing our execution, ensuring we have the right systems, processes and people.

 

This includes things like optimizing our supply chain, including SKU reduction, to remove unnecessary complexity from the way we design, manufacture and deliver products, upgrading our sales tools and systems to respond more quickly to customers, and increasing the productivity of our sales force by rationalizing our go-to-market.

 

The second bucket is about addressing ongoing issues in each of our businesses.  From IPG to PSG to ESSN to Services, we didn’t make the investments we should have during the past few years to stay ahead of customer expectations and market trends. 

 

As a result, we see eroding revenue and profits today.  We need to invest now, as a market leader, from a position of strength.

 

And that’s especially true, because these businesses are not only under intense competitive pressure, but also are under pressure from tectonic shifts that are taking place at the very foundation of the industry.

 

And that’s the third bucket, how we deal with these industry shifts.  We are at an inflection point when the delivery, consumption and business model for technology are all being redefined.  Long established profit pools are under pressure and other profit pools are forming fast.  We need to move quickly to capture emerging opportunities in areas like cloud, security and information management.

 

We’ve already assembled some formidable assets, now we need to align our portfolio to deliver a new generation of capabilities.  We see a once in a generation chance to define the future of technology and position HP as a leader for decades to come.

 

But to seize this moment, we have to stabilize financial performance. That’s really at the heart of any discussion of business fundamentals: generating enough profit to invest for the future and deliver solid returns for your investors — all underpinned by a disciplined capital allocation strategy.

 

And it’s clear from both our revenue and margin profile that our current cost base just isn’t supportable.

 

On the current trajectory, we just won’t have the capacity that we need to invest.  For years, we’ve basically run our business in silos and under that model we’ve built some of the leading franchises in technology.  But it has also made us too complex and too slow.  Yes, some of the obvious costs were dealt with in recent years, but there is still much more that we can do to streamline operations.

 

Even more promising is what we can accomplish by tackling our business processes.

 

We need to standardize, optimize and automate many of our processes which will allow us to scale the business without increasing costs at the same rate.  We can take a ton of complexity out of the system, improve our effectiveness and significantly reduce costs. 

 

It’s not easy work and it’s not a quick fix, but it holds the potential to improve the way we operate and execute and it simply has to be done.  We have got to save to invest.  We have got to save to grow.

 

In the near term, our focus remains on stabilizing the business, driving execution and getting back to basics like aligning our cost structure with our revenue profile.

 

Long-term, we’ll invest to capture opportunities in cloud, security and information management that will position HP as a leader for decades.

 

We have a lot of work to do; I’ve gained visibility into the business over the last few months.

 

I feel very good that we know the challenges.  We know what we’re going to do about them and we’re headed in the right direction.

 

After the time I’ve spent with all our stakeholders, I am increasingly confident and optimistic about what we’re doing.  We have incredible strength and an incredible community of people who care deeply about HP.

 

With their support, we’ve embarked on rebuilding HP in a thoughtful way that is true to the spirit of innovation, financial discipline and financial success that has defined this company.

 

I have no doubt that we’ll turn HP around. 

 

I look forward to continuing our dialogue about HP’s progress in the coming quarters, and I appreciate your continued support for our company.

 

<end transcript>

 

Earnings announcement presentation

For more information

Read the full announcement at the HP Newsroom, HP Investor Relations or follow @hpnews on Twitter.

 

Use of non-GAAP financial information

To supplement HP’s consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP net revenue, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share, gross cash and free cash flow. HP also provides forecasts of non-GAAP diluted earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below. In addition, an explanation of the ways in which HP management uses these non-GAAP measures to evaluate its business, the substance behind HP management’s decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP management compensates for those limitations, and the substantive reasons why HP management believes that these non-GAAP measures provide useful information to investors is included under “Use of Non-GAAP Financial Measures” after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, operating profit, operating margin, net earnings, diluted earnings per share, cash and cash equivalents or cash flow from operations prepared in accordance with GAAP.

 

Forward-looking statements

This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, earnings per share, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of cost reduction programs and restructuring and integration plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP’s businesses; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring and integration plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011 and HP’s other filings with the Securities and Exchange Commission. As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP’s Form 10-Q for the fiscal quarter ended January 31, 2012. In particular, determining HP’s actual tax balances and provisions as of January 31, 2012 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP’s Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

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