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HP Reports Second Quarter 2012 Results

HP today announced financial results for its second fiscal quarter ended April 30, 2012.  For the quarter, net revenue of $30.7 billion was down 3% year over year both as reported and when adjusted for the effects of currency.

 

- Second quarter non-GAAP diluted earnings per share of $0.98, above previously provided outlook of $0.88 to $0.91 per share

- Second quarter GAAP diluted earnings per share of $0.80, above previously provided outlook of $0.68 to $0.71 per share

- Second quarter net revenue of $30.7 billion, down 3% from the prior-year period

- Company announces multi-year restructuring to fuel innovation and enable investment

 

(Editor's note: for more details, read today's press releases, "HP Reports Second Quarter 2012 Earnings" and "HP Launches Multi-year Restructuring to Fuel Innovation and Enable Investment")

 

HP CEO Meg Whitman and CFO Cathie Lesjak also hosted a live audio webcast to review HP’s financial results today.  A replay is available at www.hp.com/investor/2012Q2webcast.

 

HP Investor Presentation

HP 2Q12 Earnings Presentation
View more presentations from Hewlett-Packard

Transcript: CEO Meg Whitman's prepared remarks during investor conference call

The second quarter marked my first 6 months at HP, and I continued to learn about the company every day.

 

It’s inspiring.  You’re surrounded by incredible technology, tremendous innovation, and the people are just terrific.

 

For example, since we last spoke, I participated in TechCon, which is HP’s annual internal innovation show – think of it as the world’s greatest science fair for adults – and I was just blown away.

 

The excitement.  The enthusiasm. The commitment of HP’s technical and innovation community is amazing.

 

From nano-scale sensing technologies, to the memristor, to software that can actually learn, we have an array of forward looking technologies that are revolutionary.

 

Without question, our innovation engine is alive and well.  Now, we just need to do a better job of aligning that engine with our businesses and developing a better, faster path to market.

 

I also recently attended the Drupa conference, which is a show held every four years in Dusseldorf, Germany to showcase the very latest in commercial graphics and printing.  And again, I was deeply impressed.

 

It’s a chance to see our Color Inkjet web press and Indigo portfolio in context.  You can see customers and potential customers gravitating towards our innovation... 

 

And you clearly see the shift from analog to digital commercial print happening right before your eyes.  The market is being disrupted and we’re leading the charge.  I left Drupa with a deeper appreciation for the opportunity HP has to transform that industry.


So now let’s talk about HP’s performance.  And overall, I feel cautiously optimistic coming out of Q2. Our results appear to be stabilizing.

 

While I wouldn’t say we’ve turned the corner, we’ve made progress.

For starters, we, once again, did what we said we were going to do.

 

Our guidance for second quarter non-GAAP diluted EPS was 88 to 91 cents. And we delivered 98 cents, beating the high end of our outlook by 7 cents a share on revenues of $30.7 billion.

 

While earnings and revenues were both down over the prior year period, the trajectory of the declines began to flatten in Q2 — which is encouraging.

 

Cathie will dig deeper into the numbers and the segment performance in just a few minutes, but let me share a few top level observations.


In PSG, we delivered a solid performance.

 

PSG held margins steady and an uptick in the commercial business helped offset continued weakness on the consumer side. This contributed to a sequential 6.5 percent increase in revenue, and revenue that was also up slightly year-over-year.

 

With much less impact from the HDD shortage, we executed well and achieved a 2 point sequential gain in worldwide PC market share in calendar Q1.

In the process, we reclaimed the number one share position for commercial globally, and we also took the number one position for commercial in the U.S from a competitor who’s held the top rank for more than a decade.  

 

We’re absolutely committed to outstanding product design, engineering and quality -- attributes that defined HP for decades. You can see that commitment in the big refresh of the PC and printing portfolio we announced in Shanghai a couple of weeks ago.

 

The launch gave us a boost in China, where I think we’re starting to regain some momentum.

 

And in speaking with customers and partners, I’ve heard a lot of excitement about the products we introduced like the Spectre XT and our new Multi-function Color LaserJet printer.

 

Consumers love the new products and CIOs trust them in a secure work environment. They strike the perfect balance between beautiful design and the workhorse characteristics that businesses and governments require.

 

In IPG, we improved channel inventory to within an acceptable range. However, we continued to face a weak demand environment and year-over-year IPG revenue declined by 10 percent.

 

Over the last few quarters, IPG has been challenged by external factors, such as weak consumer demand and natural disasters.

 

But we’re also getting clarity on some of the key actions necessary to continue building on IPGs leadership.

 

We’ve started marketing the quality and innovation of our hardware and supplies… and we’re working on new pricing models, services and solutions to further differentiate our offerings.

 

As you know, in Q2 we announced a strategic realignment that included having the PC and Printing businesses join forces under the leadership of Todd Bradley.

 

So far this is going very well, and we see tremendous potential for accelerated growth and efficiencies through common branding, improved marketing, better retail positioning, more attractive product bundles, and seamless, best-in-class interoperability.

 

Turning to Services, revenue was essentially flat year-over-year in constant currency, and we stabilized margins.

 

While margins may fluctuate quarter to quarter, we believe that a 10 to 12 percent range is the right, sustainable margin profile for Services through the remainder of FY 12.

 

We’re focused on building out strategic practice areas in cloud, security, information management and application transformation.

 

And we’re strengthening the industry alignment of our services business, which will help us better solve customer challenges, create more customer value and deepen customer relationships.

 

We’re excited about growing these higher margin categories, but this is a business that continues to be challenged.  It’s a journey and we have a lot of work ahead in this turnaround.

 

In Enterprise, Servers, Storage and Networking, full year revenue declined 6 percent over the prior year period. Within that, our Storage and Networking businesses held steady, logging slight annual growth.

 

Storage was a tale of two cities. Our 3par solutions continued to gain strong traction in the marketplace, growing more than 100 percent year-over-year, while revenue in our StoreOnce products almost doubled.  At the same time, tape and EVA are declining. 

 

This is an anticipated product transition and we’re effectively managing the shift to our next generation storage arrays.

 

In Networking, we have a great value proposition and innovation. In one recent deployment, we worked with AMD on implementing their Cloud Data Center.  HP networking and Server technologies helped reduce the data center footprint by more than 50 percent while increasing network capacity and improving performance.

 

And with new solutions like our recently launched virtual application networks, we plan to continue being the disruptor.

 

In industry standard servers, the HDD shortage was still a factor and we had a tough quarter.  However, there’s strong promise here.  We have some outstanding solutions in the market that we expect to restore the momentum in the category.  For example, the launch order ramp for our Gen8 ProLiant server is outpacing that of the Gen7 server.

 

Business Critical Systems, not surprisingly, is still facing challenges from the Oracle Itanium issue.  But more important is how we’re moving forward.

 

Our Odyssey solution is an innovative, mission-critical, x86 platform that will offer customers a transition to open, standards-based architectures. 

 

As part of the Q2 strategic realignment, the Global Accounts Sales organization joined Enterprise, Servers, Storage and Networking (ESSN), under the leadership of Dave Donatelli. This is also going well.

 

The new model sharpens the focus of our sales teams, moves decision making closer to the deal and provides a simplified customer experience.  The outcome is a more responsive HP that will make it easier for us to sell effectively and bring more of our portfolio to more of our accounts.

 

In conversations with customers and partners, it’s clear that they understand and appreciate the direction we’ve taken.

 

In Software, we grew 22 percent year-over-year, with growth in licenses, support and services.  We had some good wins, for example in security, we signed a SaaS testing services agreement in Europe that’s the biggest deal ever for HP Fortify.

 

However, we’re also facing some challenges. 

 

Autonomy had a very disappointing license revenue quarter, with a significant decline year over year resulting in a shortfall to our expectations.  To help improve Autonomy’s performance, Bill Veghte, HP’s Chief Strategy Officer and executive vice president of HP Software, will step in to lead Autonomy.  Mike Lynch, Autonomy’s founder and executive vice president for Information Management, will leave HP after a transition period.

 

The market and competitive position for Autonomy remain strong, particularly in cloud offerings, and we have been flooded with a number of big deal leads. Bill is an experienced software leader who will develop the right processes and discipline to scale Autonomy and fulfill its promise, although it will take a few quarters to see tangible improvements.


So, big picture, I’d say that our performance began to stabilize.  We saw some bright spots. There’s still an awful lot of work to be done, and we’re looking at every option to accelerate the pace.

 

As discussed during our Q1 call, we’re working very hard to better align HP’s cost structure with its revenue profile. We’re streamlining and removing complexity at every turn, and in the process we’re creating the capacity to invest in innovation and quality.  And over time, we’re of course thinking about how we can drop some of our savings to the bottom line.

 

The strategic realignment we announced last quarter was a good first step, and today we’re taking the next step with the announcement of a multi-year restructuring that will touch every part of HP and create a more streamlined business.

 

We expect to take a pre-tax charge of approximately $1.7 billion to be included in our FY12 GAAP results, as well as an additional pre-tax charge of $1.8 billion to be included in our FY13 and FY14 GAAP results.

 

As part of the restructuring, we expect to reduce the workforce by 27,000 positions by the end of 2014, which we’ll achieve through a combination of layoffs and a voluntary early retirement program.

 

This restructuring is expected to generate run-rate cost savings of approximately $3 to 3.5 billion exiting fiscal year 2014.

 

Workforce reductions are never easy.  They adversely impact people’s lives. But in this case, they’re absolutely critical for the long-term health of the company.

 

Our goal is simple: a better outcome for our customers at reduced cost for HP.  And while optimizing the workforce is one area that we absolutely need to get right, we see a lot of opportunity in a number of additional areas as well.

 

I know that you’re well aware of the cost reduction efforts that were undertaken in years past.  There’s been some great work on things like data center consolidation, reducing the number of applications and in horizontal functions such as HR, Legal and Finance.

 

What we’re doing now is very different.  We’re going after the big cost buckets and fundamental business process reengineering in our core businesses.

 

This includes optimizing the supply chain, reducing the number of SKUs and platforms, continuing to hone our real estate strategy, simplifying our go-to-market, improving business processes and implementing consistent pricing and promotions to drive end-user demand profitably.

 

It’s harder work, but we believe it will have a significant payoff over the long term.

 

Over time, some of the savings will drop to the bottom line, but the majority will be reinvested using a disciplined, data-driven process to prioritize organic opportunities across the business.  Return on investment will be evaluated on an ongoing basis and the investments will be calibrated accordingly.

 

We’ll be investing to drive leadership in the three strategic pillars of cloud, security and information management.  And in each of our businesses, we’ll make investments to stay ahead of customer expectations and market trends.

 

In our PC and Printing businesses, we’ll be focused on design, engineering, quality, and generating demand and desire with our customers.

 

In Services, we’re improving processes and building-out capabilities in cloud, security and information. We’ll also be strengthening our industry practices, as well as our service quality and innovation.

 

In Software, we’ll be investing to speed development across Security, Information and Management Infrastructure for both on-premise IT and in the cloud – with a key focus on software-as-a-service offerings. This will include the extension of Vertica and Autonomy across our entire portfolio, for example deploying them in our document workflow solutions or in building out our Information Management Practice in Services.

 

And in ESSN, we’ll invest to drive R&D and innovation in our core businesses of servers, storage and networking. Together they create a converged infrastructure that is the foundation for top customer initiatives such as cloud, big data analytics and social media.

 

We’ll also invest in our people – in better training and career development. 

 

There’s a lot we have to do, and we are moving quickly.  But we’re not taking our eye off the ball when it comes to executing against our ongoing priorities.  I’ll share just a few examples.

 

In the last quarter, we continued to improve our sales tools with the first wave rollout of our new CRM system and enhancements to hp.com.

 

And in the PC space, a major Mac reseller has taken on the Z1 workstation, which offers a combination of accelerated performance and design that’s not available in any other product on the market today.

 

We also continued to drive our strategy with the announcement of the HP Converged Cloud, the industry’s first hybrid delivery approach and portfolio based on a common architecture spanning traditional IT, private, managed and public clouds.

 

We announced ten new products and services to our already extensive cloud portfolio.   And customers are embracing the accelerated innovation, enhanced agility and lower cost that our solutions provide.

 

At HP Discover, we’ll be sharing a lot more about our strategy, our portfolio and how we’re helping customers succeed.  So stay tuned.

 

I covered a lot today, so let me leave you with a few final thoughts.

 

During our second quarter, we did what we said we were going to do.  HP showed some positive, early signs of stabilizing performance.  We made progress in a number of areas and delivered on our outlook.

 

We remain confident, and expect to achieve non-GAAP earnings per share of at least $4 for FY12 - even before any savings from the restructuring. 

 

While the restructuring should improve EPS over time, the pace at which we’re able to realize savings and reinvest them is likely to vary quarter to quarter, so we don’t expect the progress to be completely linear.  Things like normal seasonality may not play out exactly the way you’re used to seeing it, so our guidance is going to be important.

 

But what matters most, I believe, is that HP is now taking aggressive steps to rebuild and strengthen the company for the long term.


I am more confident than ever in our path and in our future.

 

By removing complexity, we’re making it easier to do business with HP, easier to sell HP products, and easier to work at HP – we’re building HP into a more efficient and effective organization that can survive the test of time.

 

And we’re creating the capacity to invest to drive innovation against our strategic pillars of cloud, security and information management to advance each of our businesses, and to ultimately deliver better returns for our shareholders.

 

Turning HP around is going to be a lot of hard work.  It’s going to take time.  But we know what needs to be done.  And with the actions we’ve announced today, we’re fast advancing the process.

 

<end transcript>

 

This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of HP and its consolidated subsidiaries could 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 forecasts or projections of the extent or timing of cost savings, charges, use of cost savings, revenue or profitability improvements, or other financial items; statements of the plans, strategies and objectives of management for future operations, including the timing and execution of cost reduction programs, restructuring plans, retirement programs and the number of employees impacted by such plans and programs; any statements concerning HP's expected competitive position or performance; any statements concerning expected development, performance or market share relating to products and services; any statements regarding anticipated operational and financial results; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the timing and execution of cost reduction programs, restructuring plans and retirement programs; employee management issues and negotiations with works councils and employee representatives; estimates and assumptions related to the cost of exiting employees and pension and other post-retirement costs; 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; and other risks that are described in HP’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2012 and HP’s other filings with the Securities and Exchange Commission, including HP’s Annual Report on Form 10-K for the fiscal year ended October 31, 2011. HP assumes no obligation and does not intend to update these forward-looking statements.

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