HP Reports First Quarter 2011 Results

• First quarter GAAP diluted earnings per share up 26% year over year with non-GAAP diluted earnings per share up 27% and cash flow from operations up 28%
• First quarter gross margins up 1.5 percentage points year over year to 24.4%
• Continued strength in commercial hardware, with Enterprise Servers, Storage and Networking revenue up 22% year over year with growth in commercial PC Clients and Printers of 11% and 13%, respectively
• Raising full year GAAP diluted earnings per share outlook to $4.46 to $4.54 and non-GAAP diluted earnings per share outlook to $5.20 to $5.28

PALO ALTO, Calif., Feb. 22, 2011 – HP today announced financial results for its first fiscal quarter ended January 31, 2011. Net revenue of $32.3 billion was up 4% from the prior-year period both as reported and in constant currency.

GAAP diluted earnings per share (EPS) was $1.17, up 26% from $0.93 in the prior-year period. Non-GAAP diluted EPS was $1.36, up 27% from $1.07 in the prior-year period. Non-GAAP financial information excludes after-tax costs of approximately $0.19 per share and $0.14 per share in the first quarter of fiscal 2011 and 2010, respectively, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges. Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.

“I’m pleased with our EPS and margin expansion during the quarter. Going forward, we have the opportunity to further capitalize on our customers’ demands for higher value-added solutions,” said Léo Apotheker, HP president and chief executive officer. “HP has a powerful portfolio, including exciting, recently announced cloud and connectivity offerings. We are focused on leveraging these strengths to extend our leadership and accelerate growth.”

“HP’s financial strength and discipline helped generate $3.1 billion in cash flow from operations, up 28% year over year,” said Cathie Lesjak, HP executive vice president and chief financial officer.

Trends and regional performance
HP saw balanced growth in the first quarter across all regions in local currency, with accelerated growth in BRIC countries (Brazil, Russia, India and China). Results were largely driven by momentum in the commercial sector as businesses continued to spend on technology. HP experienced uneven consumer performance across its geographies and product categories during the quarter.

First quarter revenue was up 6% in the Americas to $14.4 billion. Revenue was flat in Europe, the Middle East and Africa and up 7% in Asia Pacific to $12.1 billion and $5.8 billion, respectively. When adjusted for the effects of currency, revenue was up 5% in the Americas, up 4% in Europe, the Middle East and Africa and up 2% in Asia Pacific. Revenue from outside of the United States in the first quarter accounted for 65% of total HP revenue, with revenue in the BRIC countries increasing 11% while accounting for 11% of total HP revenue.

Business group highlights

• Personal Systems Group (PSG) revenue declined 1% year over year with a 6.4% operating margin. PSG delivered record operating profit in the quarter and remains the PC market leader in terms of units, revenue and profit share. The commercial refresh cycle continues, and HP saw 11% year-over-year revenue growth in Commercial Clients while revenue in Consumer Clients declined 12% in the quarter.
• Imaging and Printing Group (IPG) revenue grew 7% year over year with a 17.0% operating margin. IPG delivered strong performance across the business with share gains in all printing categories and 33% year-over-year growth in commercial printer hardware units. IPG continued to drive innovation and momentum with the new ePrint platform, graphic arts and other commercial print solutions.
• Services revenue declined 2% year over year with a 16.0% operating margin. Services operating margin expanded 30 basis points year over year due primarily to service delivery transformation efforts. Enterprise Services had solid long-term signings in the first quarter, the impact of which was partially offset by softer signings in shorter term, higher value-added services and add-on IT outsourcing projects.
• Enterprise Servers, Storage and Networking (ESSN) revenue grew 22% year over year with a 14.7% operating margin. ESSN delivered a solid quarter, demonstrating increased value to customers as they transition to hybrid cloud environments through a converged infrastructure, including innovations in servers, storage and networking.
• HP Software revenue grew 5% year over year with a 17.6% operating margin. HP Software expanded its security footprint with the integration of Fortify and ArcSight during the quarter.
• Financial Services revenue grew 15% year over year with a 9.6% operating margin. Financial Services growth was driven by both double-digit growth in lease volume and a healthy improvement in portfolio assets.

Asset management
HP generated $3.1 billion in cash flow from operations in the first quarter. Inventory ended the quarter at $6.7 billion, with days of inventory flat year over year at 25 days. Accounts receivable of $16.6 billion was up 4 days year over year. Accounts payable ended the quarter at $13.5 billion, down 1 day from the prior-year period. HP’s dividend payment of $0.08 per share in the first quarter resulted in cash usage of $175 million. HP also utilized $2.3 billion of cash during the quarter to repurchase approximately 54 million shares of common stock in the open market. HP exited the quarter with $10.0 billion in gross cash.

Outlook
For the second quarter of fiscal 2011, HP estimates revenue of approximately $31.4 billion to $31.6 billion, GAAP diluted EPS in the range of $0.99 to $1.01, and non-GAAP diluted EPS in the range of $1.19 to $1.21.

Second quarter fiscal 2011 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.20 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2011 revenue in the range $130 billion to $131.5 billion, GAAP diluted EPS in the range of $4.46 to $4.54, and non-GAAP diluted EPS in the range of $5.20 to $5.28.

Full year fiscal 2011 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.74 per share, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

As part of its annual financial review process, HP implemented several organizational realignments effective Q1 FY11. To provide improved visibility and comparability, HP has reflected these realignments in prior financial reporting periods on an as-if basis. These realignments resulted in, among other things, the transfer of revenue within and among various financial reporting segments and business units. The changes do not impact HP’s previously reported consolidated net revenue, earnings from operations, net earnings, or earnings per share at the company level. To reflect these changes, HP released modified quarterly and annual consolidated condensed statements of earnings, segment financial results and statements of business unit revenue for fiscal 2009 and 2010, which are available on HP’s Investor Relations website at www.hp.com/investor/home.

More information on HP’s quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at www.hp.com/investor/home.

HP’s Q1 FY11 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2011q1webcast.
 

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP (NYSE: HPQ) is available at http://www.hp.com.

Use of non-GAAP financial information
To supplement HP’s consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below. In addition, an explanation of the ways in which HP management uses these non-GAAP measures to evaluate its business, the substance behind HP management’s decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP management compensates for those limitations, and the substantive reasons why HP management believes that these non-GAAP measures provide useful information to investors is included under “Use of Non-GAAP Financial Measures” after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for operating profit, operating margin, net earnings, diluted earnings per share, or cash and cash equivalents prepared in accordance with GAAP.

Forward-looking statements
This news release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, share repurchases, currency exchange rates, the impact of acquisitions or other financial items; any statements of the plans, strategies and objectives of management for future operations, including the execution of cost reduction programs and restructuring plans; any statements concerning the expected development, performance or market share relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include the impact of macroeconomic and geopolitical trends and events; the competitive pressures faced by HP’s businesses; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the protection of HP’s intellectual property assets, including intellectual property licensed from third parties; integration and other risks associated with business combination and investment transactions; the hiring and retention of key employees; assumptions related to pension and other post-retirement costs; expectations and assumptions relating to the execution and timing of cost reduction programs and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010 and HP’s other filings with the Securities and Exchange Commission. As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP’s Form 10-Q for the quarter ended January 31, 2011. In particular, determining HP’s actual tax balances and provisions as of January 31, 2011 requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities), which is being completed in the ordinary course of preparing HP’s Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

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