Tuesday, February 14, 2012

HP Earnings Preview: Rebound Projected but Continued Weak Performance

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HP (HPQ) Quarterly Earnings Announcement

HP will report QE January 2012 financial results on Wednesday, February 22, after market close. The conference call will be at 2:00 p.m. PT.


HP Future and Past Financial Performance
Estimated QE January 2012 Earnings per Share (Non-GAAP)
Yahoo Finance Analysts Estimates: $0.87 avg, $0.83 low, $1.01 high, 28 analysts
Prior Quarter: $1.17
Prior Year: $1.36
HP Outlook: $0.83 to $0.86


Prior QE October 2011 Financial Results (GAAP) When HP reports QE January 2012, the 3 months ended January, financial results on February 22, HP is expected to meet, beat, or miss various prior quarterly results. These prior quarterly financial results were:
Total Revenues $32.12B
Operating Income $795M
Net Income $239M
Earnings per Share $0.12
Cash Flow per Share $1.20
Gross Profit Margin 21.14%
Operating Income Margin 2.47%
Net Income Margin 0.74%


Summary (GAAP) Overall, the QE January 2012 is expected to be a rebound for Earnings per Share from the abysmal prior quarter, up QoQ but still significantly down YoY. HP continues in flux with a new CEO, Meg Whitman, and now staying in the consumer PC market. This was after announcing a "historic company transition" last summer, which included leaving the consumer PC market. Therefore, financial performance is expected to continue historically weak as reorganization of the reorganization is implemented. For the QE January 2012, HP is expected to miss QoQ and YoY on Total Revenues. HP is expected to beat QoQ and miss YoY on Operating Income, Net Income, Earnings per Share, and probably on Cash Flow per Share. HP should meet or just miss QoQ for Gross Margin, already at a multi-year low, and beat QoQ on Operating Margin and Net Margin. All 3 margins are expected to miss YoY. The prior quarterly review is below.


HP Reports Declining Financial Results, EPS $0.12


HP Prelude QE October 2011 New CEO Meg Whitman, former eBay CEO and California Governor candidate, has the task of redefining HP. This is after HP already attempted to redefine itself through fired CEO Léo Apotheker. CEO Apotheker and the Board of Directors announced in the prior quarter a "historic company transition" including leaving the consumer PC market, leaving the webOS mobile device market, and entering enterprise cloud computing services. CEO Whitman announced in late October HP is now keeping the personal systems group, staying in the consumer PC market. HP is in flux and the "new HP" remains to be seen. When a new CEO, in this case Whitman, says "We need to get back to the business fundamentals", this usually means disarray.


HP Summary QE October 2011 (GAAP) Financial performance dropped again in QE October 2011 from the prior quarter. Total revenues did increase QoQ, but were down YoY. Operating income, net income, earnings per share, cash flow per share, gross margin, operating margin, and net margin hit multi-year lows. Debt increased to a multi-year high of 23.65% of total assets. The QE October and QE January are the strongest quarters for HP, so these are very disappointing financial results. However, the bottom may be in for HP. HP is projecting QE January 2012 earnings per share to increase to $0.61 - $0.64. HP has a large, embedded product financing operation which results in lower financial performance than other technology companies. Financial position continues as acceptable, with adequate capital, moderate debt, and adequate liquidity.


HP Income Statement QE October 2011 (GAAP) HP reported total revenues of $32.12, net income of $795M, and earnings per share of $0.12. From the prior quarter QE July 2011, total revenues were up +2.99%, net income down -87.59%, and earnings per share down -87.10%. From the prior year QE October 2010, these were down -3.47%, down -90.58%, and down -89.098%, respectively. Gross margin, operating margin, and net margin were down QoQ and YoY to multi-year lows of 21.14%, 2.47%, and 0.74%, respectively. Cash flow from operations of $1.20 was down QoQ and YoY. The operating expense ratio (operating expenses divided by total revenues) of 18.66% is a multi-year high.


HP Balance Sheet QE October 2011 (GAAP) HP's total assets increased +3.68% QoQ to a record $129.52 billion. The capital to assets ratio (total stockholders' equity divided by total assets) of 30.11% is adequate, but another multi-year low. The current ratio (current assets divided by total assets) of 39.39% is a multi-year low. The return on assets of +5.67% is a multi-year low. Total debt is higher at 23.65% of total assets and a multi-year high.


HP Financial Performance by the Quarters


HP GAAP Earnings Per Share Current Earnings per Share of $0.12 is down -87.10% QoQ, down -89.09% YoY, and a multi-year low. The recent peak was prior QE January 2011 of $1.17. The lows have been $0.75 in QE July 2010 and $0.69 in QE July 2009. The chart average EPS is $0.84.

 


HP Cash Flow per Share Current Cash Flow per Share of $1.20 is below average and a 7-quarter low. The peak was $2.04 in QE April 2010. The lows have been QE January 2009 of $0.99 and QE January 2009 of $0.46. The chart average CFS is $1.37.

 


HP Total Revenues, Operating Income, and Net Income Current Total Revenues of $32.12B is a 3-quarter high, up +2.99% QoQ and down -3.47% YoY. Total Revenues have generally been stable for the past 9 quarters, ranging from a low of $30.73B in QE July 2010 to a high of $33.28B in QE October 2010. The TR chart average is $31.56B. Current Operating Income of $795M is a multi-year low and had ranged from a low of $2.32B in QE July 2010 and a high of $3.39B in QE January 2011 in the prior 8 quarters. The OI chart average is $2.70B. Current Net Income of $239M is also a multi-year low, down -87.59% QoQ and down -90.58% YoY. Net Income had ranged from a low of $1.78B in QE July 2010 to a high of $2.61B in QE January 2011 in the prior 8 quarters. The NI chart average is $2.03B.

 


HP Gross Margin, Operating Margin, and Net Margin Current Gross Margin of 21.14% is a multi-year low. The GM chart average is 23.60%. Current Operating Margin of 2.47% is a multi-year low and was pulled down by a decrease in gross profit, increase in S,G,&A expenses, and impairment of goodwill and purchased intangible assets. The OM chart average is 8.55%. Current Net Margin of 0.74% is a multi-year low. The OM chart average is 6.43%. The average income tax rate of 39.34% is a multi-year high.

 


HP Return on Assets The total net income for the most recent 4 quarters is divided into average assets for the most recent 4 quarters to obtain a rolling annualized ROA, an annualized return on average assets for the 12 months (4 quarters) ended. Current Return on Assets of +5.67% is a multi-year low. Return on Assets previously had been stable in the 7%+ range. The chart average ROA is 7.30%.

 


HP Growth Rates Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for total revenues and earnings per share. Current Total Revenues Growth of -3.47% YoY is an 8-quarter low. The chart average TRG is +4.02%. Current Earnings per Share Growth of -89.09% YoY is a multi-year low. The chart average EPSG is +7.33%.

 


HP Revenue Sources The current quarter was an increase in all major segments, but still below the prior year QE October 2010 peak overall. Corporate Investments were a loss of -$94M.

 


HP Geographic Revenues For the current quarter, Americas revenues were $14.5B and 45% of total revenues. Europe, Middle East, Africa were $11.7B and 36% and Asia Pacific was $6.0B and 19%. International sales, outside of U.S., were 65% of total revenues and included within the above totals. BRIC countries (Brazil, Russia, India, and China) were 12% of total revenues and included within the above totals.




HP Operating Expense Ratio The current Operating Expense Ratio of 18.66% is a multi-year high. Slightly higher total revenues were offset by a decrease in gross profit, increase in S,G,&A expenses, impairment of goodwill and purchased intangible assets, a loss in corporate investments, and a higher income tax rate. This indicates a decreased efficiency and a lower proportion of revenues is reaching the bottom line, net income. The chart average OER is 15.12%.

 

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