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HP Q2 Earnings Beat Street; Sales and Guidance Weak

Cathie Lesjak is named CFO of HP Inc. after the split later this year.

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Shares of Hewlett-Packard rose by more than 1 percent in after-hours trading as the company’s earnings beat the consensus view of analysts, though sales came in slightly below expectations in part because of the effect of currency exchange rates.

Profits were better than the 86 cents a share that analysts expected, while sales fell slightly short of the $25.6 billion that had been expected. Revenue fell 7 percent from the year-ago period, or by 2 percent on a currency-adjusted basis.

HP reiterated its guidance for the fiscal year, saying it expects to earn between $3.53 and $3.73 per share, straddling the consensus view of $3.64. For the third quarter, HP said it expects to earn between 83 cents and 87 cents a share, which is on the low side, versus the consensus view of 87 cents.

It also said it expects to incur dis-synergy costs — additional ongoing operational costs resulting from the forthcoming split into two companies later this year — of $400 million to $450 million.

It also said that CFO Cathie Lesjak will become CFO of the new HP Inc., the PC and printing company, joining its new CEO Dion Weisler after the company splits in two in November. This is a change from the prior plan. During a conference call, Whitman said after considering outside candidates, that it made more sense to move Lesjak over to HP Inc. where her experience could be of more use to Weisler, who will be making his debut as a freshman CEO.

“I told Meg that I would go either way after the separate and I’m happy to go where I could make the most difference” Lesjak said in an interview after the conference call.

Tim Stonesifer was named CFO of Hewlett Packard Enterprise, and will be working under CEO Meg Whitman; he’s currently CFO of the Enterprise Group. Chris Hsu was named COO of Hewlett-Packard Enterprise.

Turning to the business units, sales in the personal systems group, HP’s name for its PC unit, fell 5 percent year-over-year to $7.7 billion and the unit posted a 3 percent operating margin. Sales of commercial PCs fell 7 percent, while sales to consumers fell 2 percent. Unit sales rose 2 percent, indicating the prices continue to fall amid a super-competitive environment. Notebook sales rose 19 percent on a unit basis, while desktop sales fell 14 percent.

Printing revenue fell 7 percent to $5.5 billion versus the year-ago period and reported an 18.3 operating margin. Unit sales fell 4 percent overall, while commercial printer sales rose 1 percent and consumer units fell 6 percent. Sales of printer ink and paper, once a profit center, fell 5 percent.

Enterprise Group revenue fell 1 percent to $6.6 billion versus the year-ago quarter with a 14.5 percent operating margin. Sales of industry standard servers rose 11 percent, while storage revenue fell 8 percent. Business critical server sales fell 15 percent, and sales of networking gear fell 16 percent.

Enterprise services, probably the most problem-plagued business unit of HP, posted another year-on-year revenue decline of 16 percent to $4.8 billion with an operating margin of 4 percent. Software sales fell 8 percent to $892 million.

So if you’re having a hard time getting your head around the currency problems HP is having, here’s a handy slide from the conference call that shows what’s going on. It shows HP revenue trends going back to 2012 both as reported (the black line), and after adjusting for the effects of currency exchange rates (the blue line). You can see that as the U.S. dollar has gotten stronger over time, the hit to revenue has gotten considerably stronger, and in this quarter was nearly 7 percent. HP does its best to hedge against this with various tricks in the financial markets, but even those are having little effect. Remember that HP does about two-thirds of its business outside the U.S.


In a short interview, Whitman said the currency environment has been especially hard on the printing business, where Japanese competitors can sell in their local currency without having to suffer the currency-exchange hit, and can price aggressively too. “We call that the double-whammy,” she said.

Whitman sounded to me a touch less aggressive about the potential for more acquisitions before the split is completed in November, but still open to the idea. When I interviewed her last quarter, it was only days before HP confirmed that it had agreed to spend $3 billion on Aruba Networks, so it follows that her tone that day was more bullish.

“When the right acquisitions come along we’re willing to seek them out on both sides of the house,” Whitman said, referring to the HP Enterprise and HP Inc. sides of the company. Hewlett-Packard Enterprise, she said, is likely to be the more acquisitive of the two — if for no other reason than it will be walking away from the split with more cash.

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