HP Still Has $13 Billion In Cash

Yesterday Hewlett-Packard (NYSE:HPQ), the leader in the PC market with annual revenue of $118.4 billion, reported second quarter results that were in line with estimates thanks to its cost-cutting efforts. While some companies like Cisco and Intel were signaling a stabilizing economy, HP reported a fall in sales and profit.

Net revenue in Q2 was down 3% to $27.4 billion. Net earnings were down 17% to $1.7 billion or $0.70 per share. Gross margin was 23.5%, down 150 basis points from 25% last year mainly due to the low-margin EDS and declines in the hardware businesses. Non-GAAP EPS was $0.86 per share. Q1 analysis is available here.

By segment, Services had the strongest quarter, with profits doubling to $1.2 billion and revenue increasing 99% to $8.5 billion mainly because of the EDS acquisition. However, the traditionally strong Storage and Servers, Personal Systems, and Printing segments all declined in the double digits.

Enterprise Storage and Servers (ESS) revenue was $3.5 billion, down 28%. Storage revenue declined 22% with the midrange EVA product line down 21%. Industry Standard Server revenue and Business Critical Systems revenue declined 29%, while ESS blade revenue declined 12%.

Personal Systems Group (PSG) revenue declined 19% to $8.2 billion but attained the leading PC market position in all regions. Revenue from Notebooks declined 13%, while Desktops declined 24%.

Imaging and Printing Group (IPG) revenue declined 23% to $5.9 billion. Supplies revenue was down 14% partly due to channel inventory realignment, and printer unit shipments decreased 27%. HP is the undisputed market leader in printing, with over twice the market share of its nearest competitor, and is the company driving innovation in the industry with retail publishing systems, TouchSmart technologies, the Indigo 6000 and new mobile and cloud printing technologies. However, with the world turning green, people are printing less and less, a trend that cannot help the company in the future.

HP Software revenue declined 15% to $880 million with Business Technology Optimization and Other Software revenue declining 15%. HP Financial Services (HPFS) revenue was $641 million, down 6%.

By region, revenue from the Americas grew 9% to $12.1 billion, EMEA declined 11% to $10.6 billion and Asia Pacific declined 10% to $4.7 billion. Revenue from outside of the United States accounted for 64% of total revenue, and revenue in the BRIC countries accounted for 9% of total revenue and declined 12% from the same period last year.

Cash flow from operations was $5 billion and HP ended the quarter with total gross cash at $13 billion while reducing its total debt by $1.7 billion. Excluding the debt associated with its financing business, HP returned to a positive net cash position in the quarter. It paid dividends of $192 million and bought back shares worth $801 million, with $7.1 billion remaining in its share repurchase authorization.

HP plans to cut 2% of its headcount or about 6,420 people over the year as part of its cost-cutting plan. This is in addition to the layoffs of 24,000 people announced last fall. The company also expects to cash in on $500 million savings from real estate related to the EDS acquisition.

For Q3, HP expects revenue to be flat to down 2% sequentially to a range of $26.8 billion to $27.4 billion versus Street consensus of $27.5 billion. Non-GAAP EPS is expected in the range of $0.88 to $0.90. For the full year, it expects revenue to be down 4-5% in the range of $112.4 billion to $113.6 billion and non-GAAP EPS in the range of $3.76 to $3.88. Street estimate is $3.71 per share on revenue of $113.46 billion.

The stock is currently trading around $36 with market cap around $88 billion. It hit a 52-week low of $25.39 on March 9.

With Cisco announcing its data center plans and Oracle acquiring Sun, the industry is awaiting some consolidation move from HP. I earlier speculated about its buying Brocade. There is also likely to be more of a software strategy in the horizon. The $13 billion cash reserve can easily give them enough to pull in some strategic building blocks as innovators look for exits.