HP Reports Third Quarter 2012 Results

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HP today announced financial results for its third fiscal quarter ended July 31, 2012. For the quarter, net revenue of $29.7 billion was down 5% year over year and down 2% when adjusted for the effects of currency.

- Third quarter non-GAAP diluted earnings per share of $1.00, above previously provided outlook of $0.94 to $0.97 per share and in line with pre-announcement

- Third quarter GAAP loss per share of $4.49

- Third quarter net revenue of $29.7 billion, down 5% from the prior-year period and down 2% when adjusted for the effects of currency

- Returned $625 million in cash to shareholders in the form of dividends and share repurchases

(Editor's note: for more details, read today's press release, "HP Reports Third Quarter 2012 Earnings”)

Investor Presentation (on Slideshare)

HP Q3 2012 Earnings Presentation from Hewlett-Packard

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

Thank you, Rob, and thanks to all of you for joining us today. Since our last earnings call, we've made progress on HP's turnaround. We are focusing the Company on our strategic priorities and driving organizational change. These actions will make HP more efficient, easier to do business with and easier to work for. We have great opportunities in front of us but we also have a number of challenges.

Some of them are macroeconomic; others are industry trends, and frankly, some are about HP's execution. Make no mistake about it, we're still in the early stages of the turnaround. There will be challenges ahead that could create some variability in performance. But I'm confident in our ability to work through them and get to where we want to be.

With that as a backdrop, let's take a look at the third quarter. Overall we had a decent quarter and again, we did what we said we were going to do. While revenue declined 5%, or 2% in constant currency, the trajectory of the decline flattened in Q3. This is encouraging in light of the deteriorating macroeconomic environment. At the same time, we exceeded the non-GAAP diluted EPS outlook of $0.94 to $0.97 that we gave in May. We delivered $1, beating the high end of our outlook by $0.03 a share on revenues of $29.7 billion.

When you look at our performance during the quarter, there were things that we did well and there were things that we could have done better. Looking at the positives for the quarter, Storage, Networking, IPG and Hyperscale servers delivered solid results. Our 3PAR business grew more than 60% in the third quarter and we announced new enhancements to our HP StoreOnce product that delivers record breaking backup performance. This technology was developed in HP labs and includes more than 50 patent pending innovations.

In HP Networking, we delivered strong results with revenue growth up 10% over the prior year, normalized for a divestiture. Our virtual application network technology is enabling administrators to automate changes in their networks and deploy an application in minutes instead of the weeks it currently takes. In Industry Standard Servers we made progress in aligning our supply chain and engineering capabilities in Hyperscale. This is building our competitive advantage to win and win profitably in this fast-growing market.

On a less positive note, the Mainstream Server market continues to show weakness. However, we believe the progress we're making in Hyperscale will inform our capabilities to further improve in the Mainstream Server business over the long term. In IPG we saw solid margin improvement in the third quarter. Ink Advantage, our innovative business model targeting affordable printing in emerging markets made significant progress. We greatly expanded the number of countries we now cover with this program.

Our focus on the high end of the hardware market continues to show positive results with strong share gains. We also launched HP ePrint Enterprise 2.0. This amazing technology enables enterprises to easily connect every employee's mobile device to an existing fleet of network printers via HP's Cloud printing solutions.

In the area of Cloud and Information, we introduced a number of innovations including an enhanced version of our flagship product HP Cloud System. Cloud System enables enterprises and service providers to create private, managed and public cloud environments. We now have almost 750 unique Cloud System customers.

We also announced HP Converged Cloud Services for airlines. A hybrid delivery approach to the Cloud specifically designed to help airlines create new revenue streams, deliver better service to their customers, lower their costs and increase productivity. And we released our first public Cloud Services, backed by an industry leading service level agreement. Built on proven HP technologies, HP Cloud Services also leveraging open stack, providing a foundation for one of the most open and scalable set of Cloud Services in the market.

And we continue to leverage the IP of our acquisitions across the portfolio. We announced a number of integrated solutions that combine the power of Autonomy, Vertica, Enterprise Services and our Converged Infrastructure to address the problems and opportunities of big data.

Now, let me talk about our customers. And in Q3 we had some great customer wins. For example, Russian Railways, the world's second largest railway engaged HP Software to improve the efficiency of their IT operations using HP's broad portfolio of IT Management Software. The US Air Force selected HP to provide PCs and workstations around the world.

NASCAR announced the development of the NASCAR fan and media engagement center, a resource that will leverage HP's information management, analytics and social media offerings to enable NASCAR to engage with consumers through leading media channels. And Consolidated Graphics, one of the world's largest and most extensive commercial print service providers, purchased 10 HP Indigo 10,000 digital presses. These customer engagements give you a sense of the breadth and scale of the difference HP makes in the world every day.

Now, let me outline some areas where we're not where we need to be. While Enterprise Services performance in the third quarter was within our expectations, there's still a lot of work that needs to be done. Earlier this month we announced a change in leadership at ES with Mike Nefkens stepping in to lead on an acting basis. Mike is an experienced leader who has led IT transformations for a number of our largest accounts.

In addition, JJ Charhon has taken on a newly defined role as Chief Operating Officer for ES, focusing on increasing customer satisfaction and improving service delivery efficiency. ES is in a multi-year turnaround and as I have said before, progress will not be linear. We expect to see some variability in performance as we transition and build a more profitable business. We will turn ES around but it's going to take some time as we focus on margins with both our new business and contract renewals.

Moving to PPS. The PC market remains weak and channel inventory is high across the industry, ahead of new product releases. Our PC revenue was down 10% year over year, driven by this weakness and an aggressive pricing from our competitors. The reality is, we're locked in serious competitive battles but we're determined to win. We will fight to sustain our leadership position, particularly in the commercial space, while

remaining focused on profitable growth. To this end we are executing targeted marketing and promotional programs to support the business in Q4.

Autonomy still requires a great deal of attention and we've been aggressively working on that business. Among the many changes we've instituted is a global dashboard to track Autonomy's pipeline. A single global sales methodology, a single HP Services engagement process, and a global process to measure client satisfaction and service delivery progress. These actions are designed to help deliver predictable results and improve after-sale customer satisfaction.

We crossed an important customer milestone with Autonomy Live Vault, our Cloud based data protection service for content archiving, passing the 10,000-customer mark during the quarter, demonstrating great momentum for this HP Cloud service. Overall we have a very long way to go, but we are taking steps to fix the problems and help Autonomy succeed.

In Q3 we achieved significant progress in reorganizing and restructuring the Company. We made several executive moves to help strengthen HP's leadership bench and support our turnaround. Bill Veghte was named Chief Operating Officer with responsibility to further accelerate the execution of the Company's strategy. Bill is working closely with his peers to support key projects with the ultimate goal of making the collective HP more than just the sum of its parts.

And we welcomed George Kadifa as our new head of HP Software. George joined us from Silver Lake Partners and is well-known for his expertise in building and managing technology businesses and software development.

The integration of PSG and IPG is well under way. We are reducing overlap and driving cost reductions between the two businesses while at the same time taking advantage of their combined scale. We've streamlined the Enterprise Group's sales management. As I mentioned earlier, we are taking aggressive steps to right the ship at Enterprise Services.

Moving on to other parts of our restructuring. We achieved our targets in Q3 with approximately 4,000 employees leaving the Company. Given the timing of the action, we saw minimal savings due to these efforts inside the quarter. However, greater than expected acceptance of the early retirement program has accelerated the workforce reduction program and we now expect approximately 11,500 employees to leave the Company in fiscal year '12, versus our prior estimate of 9,000.

That sums up where we ended Q3. Now let me spend a couple of moments talking about Q4 and our future outlook. There are a number of headwinds we faced that fall into three areas, macroeconomic and industry trends, as well as challenges in HP's execution. I've talked before about the techtonic plate shifts in the industry that are occurring, Cloud, mobility, virtualization and more. All are impacting the way customers, both Enterprise and consumer, are leveraging technology.

This means HP needs to shift its portfolio. This will require some tradeoffs and some time. We expect the underlying macro and industry headwinds, which have recently intensified, will remain in Q4 and well into FY '13. This will pressure both our top-line performance and our ability to reposition our portfolio and make the right investments.

HP has some great assets to build on, but the near-term outlook will be challenging as we set this Company up for the long term. While there is little we can do about the macroeconomic and industry trends, execution is another matter. HP has to do a better job of executing against its goals. To that end, we've made a number of organizational changes that may be a distraction in the short term but are absolutely the right thing to do in the long term. Therefore, we expect fiscal year '12 non-GAAP EPS to be between $4.05 to $4.07, consistent with the low end of our previous outlook for the fiscal year.

So in summary, we're focused on driving innovation across our business. I'm very excited about the new products and services we will launch this fall including a new line of PCs and tablets with a focus on design, a line of multifunction printers and new additions to our security portfolio both in Software and Enterprise Services.

We're also rebuilding our balance sheet. We generated $2.8 billion in operating cash flow and $2.1 billion in free cash flow in the quarter and reduced our net debt position by over $1.5 billion in the quarter. In short, we still have a lot of work ahead of us, but with the support of customers, employees and investors I'm confident in our ability to reinvigorate HP. With that, I'd like to turn it over to Cathie to provide more detail on the

quarter.

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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.