HP Fires on All Cylinders

Revenue growth, EPS beat by a penny 

  • Fiscal Q1 revenue of $12.7 billion (B) up 4% Y/Y, 5% in constant currency (CC)
  • Q1 Printing revenue declined to $4.5B (3% Y/Y, 2% CC)
  • Printing supplies revenue comprised 67% of Printing segment
  • Supplies revenue declined 3% Y/Y (2% CC) to $3.0B
  • Printing hardware units were up 6% Y/Y
  • Consumer hardware revenues increased to $590M (2% Y/Y)
  • Printing operating profit was down to $713M (9% Y/Y)
  • Printing Operating Margin was 16%, down 1.0 points Y/Y
  • In Q1, approximately 350 employees left under head count reduction plan
  • Head count target dropped from 3,000-4,000 to 1,500 to 2,500 personnel
  • Plan is $1B in productivity savings for the year

Our View

HP delivered another solid quarter with a revenue beat of $12.7B vs. analysts’ consensus of $11.8B – definitely unexpected. It was a strong start for HP’s 2017 fiscal year and Dion Weisler, HP CEO, commented, “We are the pillar of stability now, on innovation, on security, on what have you, and we have increased confidence in our ability to deliver on our financial commitments.” (see Figures 1, 2, 3, and 4).

As a matter of fact, “innovation” was the key word throughout the earnings call, being cited 16 times, with the “Four Box” term mentioned six times, and “execution” mentioned five times.

Revenue from Personal Systems rose 10% (Y/Y) to $8.2B driven by notebook computer revenue up at 16%. Workstation revenue was up 11% as well. “The last time we saw this level of growth was in 2014, triggered by the XP refresh cycle,” remarked Weisler. HP outperformed all of its key competitors and achieved its highest ever worldwide market share of slightly under 22%.

Printing revenue was down 3% to $4.5B. Consumer hardware revenue increased 2%, commercial hardware was down 8%, and supplies revenue was also down 3%.

Growth in consumer printing was driven by two areas – HP DeskJet and HP Sprocket, a new category in mobile print (it is a handheld photo printer). The product completely sold out over Christmas and contributed about 1.6 points of unit growth. It is the world’s smallest printer.

Printing hardware units were at a positive 6% (Y/Y) vs. last year’s negative 16%, a 22-point spread. HP attributed this to getting its cost structure in shape and going after positive NPV units. Interestingly, average selling prices during this period were down, however, since HP is concentrating on placing positive NPV unit placements, supplies will eventually help turn these units profitable.

HP expects supplies to have similar revenue in Q2 as Q1, but for the full year due to its productivity initiatives, it will stabilize supplies on a constant currency basis. Part of HP’s “supplies stability” strategy is to have smaller discounts, not sell supplies on promotion, and help its customers to understand the value of using HP branded ink and toner. What they have noticed is grey marketing activity has “significantly reduced” with much more stable prices in the market which is benefitting customers, channel partners, and HP’s business performance.

Weisler reported the Samsung transaction was on track and is expected to close in the second half. Since HP only has 4% market share in the A3 market, he felt the potential upside is huge. Cathy Lesjak, HP CFO, said HP will accelerate some Samsung integration charges (approximately $150-$200M) from FY18 to FY17 which will reduce full-year GAAP EPS outlook for 2017, but benefit 2018.

Contractual sales also had strong results with managed print services growing “faster than the market” and continued momentum in its Instant Ink enrollees.

Finally, Weisler mentioned about 3D printing. Q1 was the first quarter it had shipped units and received revenue recognition. One of its customers, Jabil, said HP’s Multi Jet Fusion 3D printer device is one of a few technologies capable of producing “production-grade parts with cost-effective efficiency.” One of Jabil’s customers said it could not believe 3D printing could produce that kind of quality.

It appears that HP has turned the corner with two quarters of top-line growth. Management seems more engaged as momentum increases from quarter-to-quarter and they are seeing positive results. Executives are containing expenses and generating rather large quantities of cash. As Weisler commented at the end of the earnings conference call, “I think this quarter can best be characterized as relentless execution and innovation that delivered really strong results.”

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