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Hewlett-Packard CEO Discusses F3Q10 Results - Earnings Call Transcript

Hewlett-Packard CEO Discusses F3Q10 Results - Earnings Call Transcript

Hewlett-Packard Company (HPQ)

F3Q10 (Qtr End 07/31/2010) Earnings Call

August 19, 2010 6:00 pm ET

Executives

TST Recommends

Jim Burns - VP of IR

Cathie Lesjak - CFO and Interim CEO

Todd Bradley - EVP, Personal Systems Group

Ann Livermore - EVP, Enterprise Business

Vyomesh Joshi - EVP, Imaging and Printing Group

Analysts

Brian Alexander - Raymond James

Ben Reitzes - Barclays Capital

Richard Gardner - Citigroup

Keith Bachman - Bank of Montreal

Katy Huberty - Morgan Stanley

Shannon Cross - Cross Research

Scott Craig - Bank of America-Merrill Lynch

Tony Sacconaghi - Sanford Bernstein

Bill Fearnley - Janney Montgomery Scott

Mark Moskowitz - JPMorgan

Abhey Lamba - ISI Group

Jeff Fidacaro - Susquehanna

Aaron Rakers - Stifel Nicolaus

Amit Daryanani - RBC Capital Markets

Presentation

Operator

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Welcome to the third quarter 2010 Hewlett-Packard earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jim Burns, Vice President of Investor Relations.

Jim Burns

Good afternoon. Welcome to our third quarter earnings conference call with Cathie Lesjak, CFO and Interim CEO; Todd Bradley from the Personal Systems Group; Ann Livermore from HP's Enterprise Business; and V. J. who runs the Imaging and Printing Group. This call is being webcast. A replay of the webcast will be available shortly after the call for approximately one year.

Some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially. Please refer to the risks described in HP's SEC reports, including our most recent Form 10-Q.

The financial information discussed in connection with this call, including tax-related items, reflects 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. 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 amortization of purchased intangibles, 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 the HP Investor Relations webpage at hp.com.

With that, I'll now turn the call over to Cathie.

Cathie Lesjak

Good afternoon and thank you for joining us. Q3 was another strong quarter of profitable growth for Hewlett-Packard that highlights our consistent broad-based performance. We grew revenue 11%, expanded operating margins 30 basis points versus the prior year and grew non-GAAP EPS by 17% to $1.08.

HP is a trusted partner with strong relationships across its customer base. Our portfolio, made up of hardware, software and services, is winning today. But more importantly, our customers recognize HP's position for the future in the data center and converged infrastructure, in connected and mobile devices, in our imaging portfolio and in the breadth of our services offerings.

In Q3, we had balanced geographic performance with revenue in each region growing faster than normal seasonality. Americas was up 12%, EMEA up 9%, and Asia Pacific grew 14%. We saw solid growth across both developed and developing economies.

Our Q3 results also demonstrate good balanced growth across IPG, PSG and our Enterprise Business with solid double-digit growth in our hardware businesses. We are capitalizing on commercial spending with ISS revenue of 31%, storage up 10%, core growth about 42%, IPG commercial up 28% and PSG commercial up 25%. Additionally, we experienced strong services signings in the quarter and increased Enterprise services hardware revenue pull-through by over 50%.

On the expense side, we continue to aggressively improve our productivity. We have significant savings still to be captured in our services, supply chain and real estate initiative. At the same time, we are increasing our investments in R&D and sales and marketing. We see attractive opportunities to take our portfolio to the next level and are focused on increasing our coverage of the $1.3 trillion market.

Before discussing our detailed financial results, let me just summarize our unique position in the market and our sustainable competitive advantages. As our results demonstrate, we continue to leverage our scale and reach to serve customers around the world and drive increased productivity. We are using our financial strength to make balanced investments in growth, efficiency and in effective capital structure.

We are delivering leading technology, products and solutions to our customers. And we will continue to leverage our talented management team to deliver consistent execution.

Now let's take a deeper dive into our numbers, beginning with the P&L. Revenue for the third quarter totaled $30.7 billion. We added $3.1 billion to the topline, delivering 11% growth, including almost a point of favorable currency impact. This was the strongest constant currency growth since 2008.

The third quarter gross margin was 23.8%, up slightly from the prior year and up 30 basis points sequentially. Operating expenses increased 10% to $3.9 billion, as we accelerated investments to drive long-term growth, including increases in R&D and building out our Enterprise sales force. Excluding the impact of the DOJ legal settlement, operating expenses increased 8%.

Non-GAAP operating profit increased 14% year-on-year to $3.4 billion, with operating margin expansion of 30 basis points. Other income and expense yielded a net expense of $135 million due primarily to currency losses.

Non-GAAP net income improved to $2.6 billion, and non-GAAP diluted earnings per share increased 17% to $1.08, including the charge of approximately $0.02 relating to the previously announced Department of Justice settlement.

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