Earnings Preview: Hewlett-Packard

Hewlett Packard Company (HPQ) is scheduled to announce its second quarter 2011 results on May 18, 2011, after the close of market and we don’t see much variation in analyst estimates at this point.

Fourth Quarter Overview

The company reported first quarter 2011 earnings per share (EPS) of $1.36, exceeding the Zacks Consensus Estimate of $1.29. However, revenue of $32.3 billion fell slightly short of the Zacks Consensus Estimate of $32.9 billion.

HP’s revenues increased 4.0% to $32.3 billion reported in the year-ago period, on a constant currency basis. The company reported broad-based revenue growth across all its segments. Moreover, the company saw sequential increases in every category; which includes consumer, commercial, desktop and notebook.

On a geographical basis, the Americas reported a 5% increase in revenue. Increases of 4% and 2% were also recorded in Europe and the Middle East and Africa, respectively. International markets accounted for 65% of the total revenue in the fourth quarter, with revenues in the BRIC countries (Brazil, Russia, India and China) increasing 11% on a year-over-year basis and comprising 11% of the total revenue.

Diluted earnings per share on a GAAP basis were $1.17 in the first quarter compared with 93 cents in the prior-year quarter. After adjusting for certain items, the non-GAAP EPS was $1.36, compared with $1.07 in the prior-year quarter.

For the second quarter of fiscal 2011, HP expects revenues of $31.4 billion to $31.6 billion, GAAP diluted EPS in the range of 99 cents to $1.01, and non-GAAP diluted EPS in the range of $1.19 to $1.21. Management’s fiscal 2011 revenue guidance is in the range of $130.0 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.

Agreement of Analysts

Out of the thirty one analysts providing estimates for the second quarter, none have made any estimate revisions in the last thirty days. For the July quarter, analysts have not made any revisions in the last thirty days. The same is witnessed for fiscal years 2011 and 2012.

Most of the news flow relating to HP continues to be positive. As per the figures published by IDC and Gartner, HP still rules the computing world, with the largest market share of 18.8%, which declined from 19.6% in the fourth quarter of 2009.

Moreover, the company has retained its leadership position in the Server segment for calendar year 2010. The data published by the leading market research firm IDC claims that HP accounted for around 39.0% of the total x86 server revenue for 2010. The company’s revenue from the x86 servers grew 34.0% year over year. Moreover, the company has remained glued to the number one position in the x86 server markets for 59 straight quarters.

Moreover, some analysts also believe, that the company is well positioned to benefit from the growing small and medium business (SMB) segment. It is also rationalizing its core portfolio by strengthening the core businesses and relocating some production to low-cost regions (such as sending its mono-laser business to Shanghai). Moreover, the company is currently focused on growing its base in emerging economies.

On the flipside, analysts also believe that HP is facing significant competition in the printing space given the continuous roll out of printing devices at competitive prices by other technology giants including Samsung, Canon (CJ), Epson, and Lexmark (LXK). This may initiate a price war in the printing space, which in turn will hurt HP’s margins going forward.

However, the industry is yet to realize the full potential of HPQ’s broad printer product portfolio ranging from entry-level inkjet to high-end commercial printers, 9000 printing and imaging patents, which has the potential to provide some cost advantage to end-consumers.

Magnitude of Estimate Revisions

There has been some revision in estimates, since the company reported its third quarter 2010 results. Overall, estimates for the upcoming quarter have gone down from $1.25, 90 days ago to $1.21 (current), with no changes in the Zacks Consensus estimate over the past 30 days.

For fiscal 2011, estimates have remained unchanged over the past 30 days. For 2012, estimates have gone down from $5.72, 90 days ago to $5.67 (current), with a 3-cent downward movement in the last 30 days.


Hewlett-Packard rules the computing world with its strong business model and leadership position in both PC and Server segments. The company is also well positioned to challenge Cisco Systems Inc (CSCO) in the networking space and gain significant market share. The company also expects to benefit substantially from the revival in the US and Asian demand.

Despite the company’s market position and compelling product line, we remain cautious about future growth, especially as, competition from other big technology players, such as Cisco Systems, Apple (AAPL), Acer, Microsoft Corp (MSFT), Dell Inc. (DELL) as well as other smaller Asian players may moderate profitability to some extent.

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