Highlights From HPQ's Q4 Conference Call: Recent Acquisitions Blending Well; Guides Above for FY

November 23, 2010 9:34 AM EST
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Hewlett-Packard Co. (NYSE: HPQ) reports Q4 EPS of $1.33, 6 cents better than the analyst estimate of $1.27. Revenue for the quarter came in at $33.3 billion, versus the consensus estimate of $32.75 billion.

Highlights From HPQ's Q4 Conference Call:

  • Sees Q1 adj-EPS of $1.28-$1.30, vs. cons. 1.22. Sales of $32.8-$33 billion, vs. the consensus of $32.74 billion.
  • Raises FY11 sales guidance from $131.5-$133.5 billion, EPS of $5.16-$5.26. The Street is looking for FY11 sales of $132.4 billion with EPS of $5.11.
  • (Lo Apotheker, President and Chief Executive Officer) HP is a company with great momentum, incredibly committed and talented people, deep customer relationships, and strong core businesses. I am confident in our future and energized about the opportunity that lies ahead.
  • When I look at our Q4 results, what's clear is that HP is winning in the market, and we have an impressive ability to execute.
  • We finished our fiscal year with $126 billion in revenue. That's a 10% year-over-year increase on an incremental $11.5 billion of growth. We grew nearly $1 billion per month last year.
  • During the same time, we expanded our non-GAAP operating profit faster than revenue, up 14% year over year, and our non-GAAP EPS grew faster at 19% for the full year.
  • We are carrying this momentum into FY11. We have the ability to drive continued growth, and at the same time, I remain committed to driving operational efficiencies into the years ahead.
  • Look at ISS's share gains and revenue, which was up 32% year over year. ProCurve networking, another good example, was up 50% organically year over year.
  • We welcomed new employees from 3PAR, ArcSight, Fortify, and Stratavia in the fourth quarter, and I'm excited about these additions, and the integrations are starting off well.
  • In the fourth quarter, we began shipping our Superdome 2, and our BCS business was up 10%.
  • (Cathie Lesjak, Executive Vice President and Chief Financial Officer) In Q4 we added $2.5 billion of new revenue, expanded gross margins and operating margins, and grew earnings per share by 17% year on year.
  • In Q4 we saw strong growth in margin-accretive solutions, such as Virtual Connect and BladeSystem Matrix, as well as the contribution from strategic acquisitions such as 3Com. These benefits, combined with disciplined pricing and promotion activity, drove gross margin expansion of 110 basis points versus the prior year to 24.8%.
  • We are investing for growth and augmenting our global sales force to improve the coverage of our $1.6 trillion addressable market.
  • Looking into the details of the quarter, revenue for Q4 totaled $33.3 billion, up 8% from the prior year or 9% adjusting for currency.
  • We continued to see momentum in the commercial sector, led by strength in converged infrastructure, managed print services, and commercial printers and PCs.
  • Looking at revenue by geography, we had balanced performance, with revenue in the Americas and EMEA increasing 10% and 6% respectively. In Asia Pacific, revenue grew 8%, with strong growth across the region, partially offset by some ongoing HP challenges in the China PC business. Excluding China, Asia Pacific achieved double-digit revenue growth.
  • Non-GAAP operating income increased 10% year on year to $4 billion, as gross margin expansion more than offset the incremental investments in sales and R&D.
  • Looking at the full year, we delivered revenue of $126 billion, non-GAAP operating income of $14.4 billion or 11.4% of revenue, and grew non-GAAP earnings per share by 19% to $4.58.
  • The Enterprise Storage and Server business produced record revenue of $5.3 billion in the quarter, up 25% year over year, with balanced double-digit growth across each business unit and every region.
  • Our Industry Standard Server business achieved the number one market share position in all three regions with growth of 32%, and ESS blades far outpaced the market with 51% growth year-over-year.
  • In Storage, revenue increased 14% from the prior year, with balanced growth across our broad portfolio.
  • We were also very pleased with the traction and buzz around the 3PAR acquisition, which closed on September 27th. We are already seeing accelerating interest in these products from our existing and new customers and expect to expand 3PAR's routes to market by leveraging HP's broad channels and enterprise sales force.
  • HP Networking, which is reported in Corporate Investments, continues to build on its worldwide momentum while executing ahead of plan. Revenue in HP Networking grew 227%, with ProCurve revenue up 50%. Our TippingPoint security portfolio also delivered strong growth.
  • Services delivered revenue of $9 billion, up slightly from the prior year.
  • Business process outsourcing revenue was down 11%, including a 7% negative impact due to the divestiture of ExcellerateHRO.
  • Services segment operating profit in the quarter increased to $1.5 billion or 16.7% of revenue, up 50 basis points from the prior year, driven by improvements in service delivery.
  • For the full year, Services delivered $5.6 billion in operating profit and expanded operating margins by 160 basis points, even as we continued to invest in sales coverage, transformation, and onboarding new deals.
  • HP Software revenue was $974 million, up 1% compared with the prior year. Business technology optimization revenue increased 4%, and other software revenue declined 6%.
  • Operating profit was $247 million or 25.4% of revenue, up from $234 million or 24.2% of revenue in the prior-year period.
  • Turning to Personal Systems. PSG revenue increased 4% from the prior year to $10.3 billion, with total unit shipments growing 2%.
  • Moving on to Palm, which is reported in Corporate Investments. We continue to invest in the Palm assets, including the WebOS and a variety of connected mobile devices. This quarter, we released WebOS 2.0 and introduced the Palm Pre 2 smartphone.
  • Imaging and printing had a strong quarter. Revenue grew 8% to $7 billion, fueled by year-over-year hardware revenue growth of 16% and supplies revenue growth of 6%. Segment operating profit totaled $1.2 billion or 17.4% of revenue. Total printer unit shipments increased 14%.
  • Business ink and wireless printer units were up 22% and 53% respectively. In addition, we shipped almost 2 million web-connected printers in the quarter.
  • HP Financial Services continues to deliver strong, consistent results. In Q4, financing revenue grew 11% to $809 million. Financing volume increased 11%, and net portfolio assets increased 14%.
  • Now on to the balance sheet and cash flow. Our balance sheet remains strong. We closed the quarter with total gross cash of $11 billion. Our fourth quarter cash conversion cycle was 21 days, up 7 days from a year ago, with days sales outstanding up 2 days, inventories flat, and days payable down 5 days.
  • During Q4, we returned $4 billion to shareholders through share repurchases and reduced our weighted average shares outstanding by 79 million shares sequentially.
  • For the full year, we generated $11.9 billion in operating cash flow, $8.4 billion in free cash flow, and returned $11 billion to shareholders through share repurchases and dividends.
  • And now a few comments on our outlook for the first quarter and full year fiscal '11. We expect Q1 fiscal 2011 revenue to be $32.8 to $33 billion. For the full year, we now expect revenue of $132 to $133.5 billion.
  • For the full year, we are raising our earnings outlook and now expect non-GAAP EPS of $5.16 to $5.26, including the one-time $0.04 gain, representing growth of approximately 13% to 15% for the fiscal year.
  • (Q&A) One for Lo and one for Cathie, if I could. Lo, first of all, you mentioned in your initial discussion the need to enhance HP's software IP position. And I was just wondering if you had any initial thoughts on whether that could be accomplished organically or through a string of pearls or smaller acquisitions, or whether HP needs to think about something more transformative there. (A) Well, it's a very interesting question. It's a bit early for me to give you a precise answer. What I can say at this moment in time is that we want to strengthen our software capabilities, both as a business and also as a cross-HP capability to add more value to the various activities that we undertake. We have many options available to us. We can do some of it organically, some of it non-organically. And you easily understand that we won't comment on any M&A activity during this call.
  • Okay, thanks. Thank you very much. And then, Cathie, I was hoping you could comment on channel inventories, especially on supplies, where it sounds like there were some price increases in Europe at the beginning of the quarter. I know typically you give channel partners advance notice of those types of price increases, and was wondering if there was any inventory increase in supplies as a result of that? Thank you. (A) Thanks, Rich. It must be Thanksgiving, since we're giving you an opportunity to answer - or ask a second question. But in terms of channel inventories, we actually exited Q4 with channel inventories in really good shape. And so there are no concerns from our perspective on the channel inventory position.
  • I wanted to ask Lo and the team about the environment and what they're seeing - what you're seeing in general. If you take your guidance, lower share count could arguably account for more than half of the raise for the year. And obviously if you put some of the sequentials. So it looks conservative on the revenue guide for the first quarter. I was wondering if you view this guidance as conservative? And if you could, talk a little bit more about what you're seeing in the marketplace, perhaps from the economic side, particularly in Europe? (A) So Ben, why don't I start with macro first, since I think that's kind of underlying a lot of your number of questions in that one. And basically from a macro perspective, what we saw was good, balanced performance across our regions. On a constant-currency basis we saw Americas grow 9.5%; EMEA was up 11%; and excluding Japan, APJ grew double-digits year on year. We also saw accelerated growth in emerging markets, including Brazil, Russia, and India. So that's kind of the macro environment that we saw. And then in terms of kind of our guidance for revenue - and I'll talk specifically about Q1. I think it's important to note, a), for the year, that we raised the midpoint of our revenue guidance and that the guidance now in Q1 shows revenue growth of 5% to 6% year on year. And you know us, we tend to be prudent. And this quarter I think there are two good reasons for that. The first one is that we did see in Q4 uneven consumer performance across our geographies and our product categories. So that's one element of prudence. And then the other element is just that we're calling for a more modest increase in revenue in Industry Standard Servers since we had seen significantly better than kind of normal seasonal growth in Industry Standard Servers for the past few quarters. And so that kind of leads us to, obviously, the guidance that we've provided for Q1 revenue.

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