Source: Seeking Alpha
Hewlett-Packard Company (NYSE:HPQ)
Q3 2014 Earnings Conference Call
August 20, 2014 05:00 PM ET
Rob Binns – VP, IR
Meg Whitman – President and CEO
Cathie Lesjak – EVP and CFO
Katy Huberty – Morgan Stanley
Toni Sacconaghi – Sanford Bernstein
Rod Hall – JPMorgan
Jim Suva – Citigroup
Benjamin Reitzes – Barclays
Maynard Um – Wells Fargo
Shannon Cross – Cross Research
Steve Milunovich – UBS
Bill Shope – Goldman Sachs
Amit Daryanani – RBC Capital Markets
Sherri Scribner – Deutsche Bank
Keith Bachman – Bank of Montreal
Aaron Rakers – Stifel Nicolaus
Good day, ladies and gentlemen and welcome to the Third Quarter 2014 Hewlett-Packard Earnings Conference Call. My name is Lesley and I’ll be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today’s call, Mr. Rob Binns, Vice President of Investor Relations. Please proceed.
Good afternoon. Welcome to our third quarter 2014 earnings conference call, with Meg Whitman, HP’s Chief Executive Officer and Cathie Lesjak, HP’s Chief Financial Officer. Before handing the call over to Meg, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately one year. Some information provided during this call may include 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.
All statements other than statements of historical facts are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, earnings per share, HP’s effective tax rate, cash flows, share repurchase, currency exchange rates or any other financial items, any statements of the plans, strategies and objectives of management for future operations, and any statements concerning the expected development, performance, market share, or competitive performance relating to products or services.
A discussion of some of these risks, uncertainties and assumptions is set forth in more detail in HP’s SEC reports, including the most recent Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. The financial information discussed in connection with this call, including any tax-related items, reflect estimates based on information available at this time and could differ materially from the amounts ultimately reported in HP’s third quarter Form 10-Q.
Revenue, earnings, operating margins and similar items at the Company level are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items, including amongst other things, amortization of purchased intangible assets, restructuring charges and acquisition-related charges. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP are included in the tables and in the slide presentation accompanying today’s earnings release, both of which are available on HP Investor Relations webpage at www.hp.com.
I will now turn the call over to Meg.
Thank you, Rob, and thanks to all of you for joining us today. The third quarter of 2014 marks an important milestone in HP’s turnaround. For the first time in three years, the Company delivered top-line revenue growth on a year-over-year basis. Revenue for the Company was $27.6 billion, up 1%. As I said many times before, turnarounds are not linear and we face some tough comparisons in the fourth quarter, but overall I continue to be very encouraged by the progress we’re making. In the third quarter, we once again achieved our financial outlook. We delivered $0.89 in diluted non-GAAP net earnings per share at the high end of our previously provided outlook and up $0.03 from the prior year period.
In addition, we achieved very strong cash flow performance, delivering $2.7 billion in free cash flow for the quarter, a good sign of improved operations and financial discipline. Our year-to-date free cash flow now stands at $7.4 billion. As a result our operating company net cash position is $4.9 billion. We also returned $881 million to shareholders in the form of share repurchases and dividends. We’re seeing the benefits of the work we have done to get our personal systems and industry standard server business back on track. Our printing supplies business and parts of our software portfolio still face some challenges but HP today is nimbler and better prepared than ever to respond to rapidly changing business conditions. So the leadership teams in both these areas are quickly addressing those challenges.
On the Enterprise Services side of the company, we’re making progress. The nature of ES with longer business cycles and lengthy contract periods, make it tough to realize improvements quickly but I believe the changes Mike Nefkens and his team are making are beginning to take hold. I’m confident that Enterprise Services is on the right path to improved performance and profitability.
The third quarter saw the introduction of some significant innovation across HP. At our Discover customer event in June, we launched the world’s first completely liquid cooled supercomputer, HP Apollo. Apollo offers high performance computing while using half the energy of competitive products.
We also introduced an all flash HP 3PAR Storage array. 3PAR is making all flash arrays viable for a range of mainstream enterprises and service providers, driving down cost while also boosting performance and scale. Initial customer reaction has been very positive.
Our software group announced new HP Atalla encryption and data protection solutions that continuously secure an organization’s most sensitive information whether it resides in a data center, an on-promise server or in the cloud. And we rolled out our vision for what we call The Machine, a new computing platform for the Big Data era. The Machine has become a rallying cry across HP and frankly around the industry for the reinvention of how we compute.
Martin Fink has focused the HP lab researchers on memristors, photonics and a new operating system at the heart of this once in a generation project. I believe we’re clearly demonstrating what I said many times before, that innovation is alive and well at HP. Over the next several months, you can expect to see the introduction of game changing products in personal systems, servers, cloud and printing, that are going to bring some real excitement to these markets.
Before I turn to business group performance, I want to take a moment to once again acknowledge the contributions of Ralph Whitworth. As all of you know Ralph stepped down last month as Chairman of HP’s Board of Directors. I would like to personally thank Ralph for his tireless efforts to help drive HP’s turnaround and for being a wonderful friend and advisor to me during the past three years. Everyone at HP is thinking about Ralph and we all wish him the very best.
HP’s Board of Directors decided to combine the roles of Chairman and CEO, and I’m honored that they’ve asked me to assume this responsibility. I believe this will help us lead more effectively through the turnaround. Let me reassure everyone that the Board and I remain fervently committed to the strong practices and financial discipline we’ve put in place during the past three years. The best interests of our investors are always top of mind, with me, and the HP Board.
Now let me turn to our business group performance in the quarter. Overall, results in Q3 were driven by good performance in personal systems, growth in industry standard servers and networking as well as disciplined cost management across all of our businesses.
In personal systems we had an excellent performance, with revenue up 12% from the prior year period. This represents the third successive quarter of revenue growth for personal systems in a market that has stabilized, but nevertheless, continues to contract. We gained market share both year-over-year and sequentially, and we’re seeing growth across all major categories. The Windows XP expiration has contributed to our growth. Although we believe we’re now through much of that benefit. However, our product line up, driven by products like our EliteBook Series and our x360 convertible notebook, is the strongest we’ve had in years and we continue to see customers looking to refresh their aging installed base.