Hewlett-Packard Conference Call

Hewlett-Packard

reported its second quarter earnings on Friday. Shares of the company traded up 6.10 percent, or $1.94, to $33.72. Below are some key takeaways from the company's conference call: Meg Whitman, HP's Chief Executive Officer • With the first half of fiscal 2014 closed I'm pleased to report that HP's turnaround remains on track. As you would expect in a turnaround of this scale, there are some businesses performing better than we expected, and others with more work to do. We've made significant progress in putting the systems and structures in place to more effectively manage the business, and we are focused on putting the right talent in place to lead the next leg of the turnaround. • Most of all, we've stabilized the top line and we're starting to see the benefits of our focus and investments in key technologies. We have more work to do to improve the consistency of our execution and lower our cost structure to drive overall profitability, but I believe we're well-positioned as we enter the second half of 2014. Rest assured, sustained, profitable revenue growth remains our top priority. • Innovation is at the heart of our strategy to turn HP around. And in the second quarter you saw the launch of several critical elements of our innovation agenda. In cloud we launched HP Helion, a portfolio of products and services that enables the next phase of our enterprise customers' cloud journey. • Helion is changing the game in cloud by allowing the integration of public, private, managed cloud and traditional IT environments on an open and secure platform. We are addressing a major pain point for the enterprise customers with Helion, and the early interest has been very positive. We also announced further significant business model innovation in our Server business, with the creation of a joint venture with Foxconn. • Together we're creating a new line of cloud-optimized servers specifically targeting service providers. This partnership brings together the high volume, design and manufacturing expertise of Foxconn with the compute, services, brand and go-to-market leadership of HP. Together, we will redefine the infrastructure economics of the world's largest service providers. • This reality is creating both opportunities and challenges for HP and every one of our competitors. To win, we have to continue to focus and make HP a more nimble, lower cost and more customer and partner-centric company. We've made a lot of progress to that end over the past two years, but we still have more work to do in our structure, our systems and our go-to-market. • Turning to the second quarter, HP delivered $0.88 in diluted non-GAAP net earnings per share, at the high end of our previously stated financial outlook of $0.85 to $0.89 per share. For the second consecutive quarter, total revenue for the company was approximately flat in constant currency and we once again delivered very strong cash flow, generating $3 billion in cash flow from operations. • HP executed well in the quarter, particularly in our commercial PC segment. Overall, PSG operating margins improved and we gained share with good growth in Europe and Japan. We reclaimed the number one position in both commercial PCs and in desktops, all against a backdrop of a declining market. Looking forward, I'm excited about the strength of our product lineup and we will remain focused on profitable growth and continuing to drive further action on our end to end cost structure. • For the fourth consecutive quarter our Printing business once again outperformed the market and saw unit placement growth and we held or gained share in every major printing category and region on a year-over-year basis, all while delivering another quarter of excellent profitability. • The decline in Business Critical Systems moderated in the quarter. Revenue was down 14% over the prior year and up 1% sequentially. Storage revenue was down 6% over the prior year as customers appeared to pause to assess new products and market innovations. • Despite the market, we still expect to gain a point of share overall. We have work to do to improve our go-to-market in this business, particularly our execution in the Americas. We've invested in additional storage sales specialists, but these take time to ramp to full productivity. Overall, we remain very confident in our Storage business. • In Technology Services, revenue declined 5% over the prior year. The nature of this business means performance typically lags hardware sales overall, so we expect revenue to stabilize in line with the progress we've made in our hardware sales. The leadership team in TS has done job an excellent job managing this business, and we continue to see very good customer adoption of our new services, and margins remain strong. • In Software revenue was flat over the prior year. Performance in the quarter was driven by growth in Autonomy licensing and strong double-digit growth in Security and Vertica, offset by softness in our traditional IT management business. Looking forward we will continue our transition to SaaS, while rejuvenating our core portfolio and investing in operational improvements across this business. Cathie Lesjak, HP's Chief Financial Officer • As Meg said, we feel good about where we are overall as we reach the midpoint of the turnaround. In Q2 total company revenue was in line with expectations, with pockets of strength in PCs and Networking. Enterprise Group revenue was somewhat lower than expected as storage revenue fell, although Converged Storage Solutions continued to outperform the market. • Total revenue for the quarter was $27.3 billion, down 1% year-over-year and approximately flat in constant currency. By region, Americas revenue was $11.7 billion, down 6% year-over-year, or down 4% in constant currency. In the U.S., revenue was impacted by key account runoffs in Enterprise Services, plus softness in laser jet printing and in most EG business units. This was partially offset by strength in commercial PCs and Networking. • In Brazil, we experienced weakness across all of our businesses. EMEA revenue was $10.3 billion, up 4% year-over-year, or up 2% in constant currency driven by growth in mature Western European economies. We experienced double-digit growth in Personal Systems in EMEA partially offset by declines in printing. APJ revenue was $5.3 billion, up 1% year-over-year, or up 6% in constant currency. • We experienced revenue growth in China primarily on the strength in Enterprise Group and printing. In Japan, Personal Systems revenue was very strong due to the XP migration. • Total Printing revenue was $5.8 billion, down 4% year-over-year, driven by a decline in supplies revenue primarily related to lower toner sales. Guidance: • Meg Whitman: In the second half of 2014 we will be accelerating these activities to ensure that we have the right structure in place as we enter 2015. As a result we now expect up to an additional 16,000 employees will leave the company under the previously announced 2012 restructuring program. • Meg Whitman: This will bring the total number of employees leaving under the program to as many as 50,000. No company likes to reduce their workforce, but the reality is that HP must be maniacally focused on continuous improvement in our cost structure. We believe this further alignment, along with the expected increased investments in innovation and infrastructure set us up as a force to be reckoned with in the rapidly shifting markets where we compete. • Meg Whitman: We've made progress, but opportunities remain for improvement in services bookings, and we need to move faster in ramping-up our cost savings and productivity initiatives. However, I'm confident that the leadership team has taken the right steps to get Enterprise Services back on track. • Meg Whitman: Against that backdrop, our Q3 outlook for non-GAAP diluted net earnings per share will be $0.86 to $0.90. And for the full year the outlook will be $3.63 to $3.75. • Meg Whitman: Overall, I'm very pleased with the progress we've made, but we still have a lot more work to do. Our focus continues to be driving innovation, simplifying our organizational structure to speed decision-making, and reducing cost. These initiatives are particularly important as we continue to navigate a rapidly shifting marketplace. • Cathie Lesjak: Through this ongoing focus, we've identified incremental opportunity as I have signaled in the past quarters, and we now expect approximately 45,000 to 50,000 people to leave the company under our announced 2012 restructuring program. This is up from our previous estimate of 34,000. We expect a total of approximately 41,000 people to leave by the end of fiscal 2014 with the remainder in 2015. • Cathie Lesjak: We expect this to create additional run rate savings in fiscal 2016 of approximately $1 billion per year on top of what we've previously laid out, although we expect some of this will be reinvested back into the business. • Cathie Lesjak: In fiscal 2014, we expect approximately $0.02 to $0.03 of incremental savings, an estimated incremental charge of approximately $500 million, and an additional cash flow impact of approximately $200 million in the second half of fiscal 2014. • Cathie Lesjak: We will provide further clarity on the specific FY 2015 impact to P&L and cash flow when we provide our outlook for the next year at our Security Analyst Meeting in October. • Cathie Lesjak: With that context, we expect full year fiscal 2014 non-GAAP diluted net earnings per share to be in the range of $3.63 to $3.75. For fiscal 2014 Q3, we expect non-GAAP diluted net earnings per share in the range of $0.86 to $0.90. From a GAAP perspective, we expect a full year GAAP diluted net earnings per share to be in the range of $2.68 to $2.80, and GAAP diluted net earnings per share for fiscal Q3 is expected to be in the range of $0.59 to $0.63.