Computing giant HP Inc. (HPQ) managed to overcome another steep sales drop in PCs and deliver better-than-expected quarterly earnings on Tuesday.
The company saw unit sales under pressure in its PC and printing segments as businesses and consumers continued to closely manage their finances post pandemic. But with HP’s various cost-cutting efforts over the past year, margins in both businesses stayed intact.
“Our disciplined execution and strong innovation in a tough macro environment allowed us to deliver non-GAAP EPS at the high end of our target in Q2,” HP CEO Enrique Lores said in a statement.
The earnings rundown
- Net sales: -21.7%% year over year to $12.9 billion vs. estimates for $13.03 billion
- Personal systems sales: -29% year over year to $8.2 billion vs. estimates for $8.46 billion
- Printing sales: -5% year over year to $4.7 billion vs. estimates for $4.6 billion
- Adjusted operating margin: 8.7% vs. 8.8% a year ago and estimates for 8.09%
- Adjusted diluted EPS: $0.80 vs. $1.08 last year and estimates for $0.76
What else caught our attention
- Red Flag: Inventory ended the quarter at $7.2 billion, up 5 days quarter over quarter to 65 days.
- Red Flag: Consumer PC and printer unit sales fell 34% and 5%, respectively.
- Mixed: Fiscal third quarter earnings estimated at $0.81 to $0.91; estimates were at $0.85.
- Good: Operating margins were unchanged in the personal systems segment despite sales decline.
- Good: Operating margins were up slightly in the printer segment despite a sales decline.
What Wall Street was saying about HP pre-earnings
Morgan Stanley (Equal Weight rating; $31 price target):
“We see a tactically positive setup into fiscal second quarter earnings given PC/Print upside in the quarter, but remain equal weighted-rated as second half ramp still not ‘de-risked’ in our view,” analyst Erik Woodring wrote. “We believe that HPQ’s Print and Personal Systems businesses performed better than feared in the April quarter, with Print units and average selling prices benefitting from incremental supply improvements and channel fill, and PC units and pricing slightly outperforming vs. low expectations.”
Evercore ISI (In-line rating; $33 price target):
“Investor focus will be on PC market dynamics (bottom in sight?), Print and management’s expectation to be above its long-term margin range for FY23, as well as free cash flow performance,” analyst Amit Daryanani said. “We do not expect any update to the FY23 guide but are slightly more constructive heading into the print given positive intra-quarter data points.”
Daryanani added that he expects fiscal year 2023 sales to be down by a low teens percentage year over year (-11.2%): “Notably, the FY23 guide implies somewhat of a hockey stick ramp for EPS, implying improvement in second half 2023 [but] caution very specifically around the trajectory of Print operating margins which could be under pressure. Near-term, we expect an in-line quarter for April but are still cautious on the back-half ramp.”
In sum, the analyst continued, “While there are potential offsets to PC weakness this year – including robust print margins, and steady free cash flow generation to enable sizable buybacks, we remain cautious on the macroeconomic overhang impeding a steep second half of the year ramp and potential for a slowdown of the average selling price uplift.”
