Wall St upbeat on HP despite sharp Q2 sales and profit drop

Share price boosted and onlookers salute early gains of Whitman's turnaround plan as EPS beats guidance

Despite Q2 results showing hefty declines for both sales and profits, HP's share price posted a double-digit spike in after-hours trading as Meg Whitman's turnaround plan begins to bear fruit.

For the three months to 30 April, the vendor's revenue shrank 10 per cent year on year to $27.6bn (£18.3bn) while operating income dropped 27.9 per cent to $1.6bn. This equates to a 1.4-point drop in GAAP operating margins when compared with the same period last year.

But despite the declines, HP exceed its earnings-per-share (EPS) guidance by five cents, with non-GAAP diluted EPS coming in at $0.87. Improvements were also made to the company's net debt position, with $3.6bn in operational cashflow generated during the quarter – a 44 per cent increase on Q2 FY12. The vendor ended the quarter with $6bn in inventory, equating to 26 days' worth of stock. This is two days down on last year's figure.

"I am encouraged by our performance in the second quarter, and I feel good about the rest of the year," said chief executive Meg Whitman. "As I have said many times before, this is a multi-year journey. We have a long way to go, but we are on track to deliver on our fiscal 2013 non-GAAP diluted EPS outlook."

HP's sales of PCs in Q2 were down 20 per cent annually to $7.6bn, with consumer revenue plummeting 29 per cent. Printing sales held up much better, falling just one per cent to $6.1bn, while an operating margin of 15.8 per cent was more or less five times as high as the figure for PCs.

The infrastructure-focused HP Enterprise Group saw turnover fall 10 per cent annually to $6.8bn, with sales of industry-standard servers declining 12 per cent. But the vendor's networking revenue grew by one per cent during the quarter.

Q2 services revenue fell eight per cent to $6bn, while software sales dropped three per cent to $941m. For the third quarter HP expects EPS to come in at a similar level, falling in the range of $0.84 to $0.87. Whitman outlined that further progress will also be made on HP's debt position.

"By the end of fiscal 2013, we expect our operating company net debt to be below pre-Autonomy levels and approaching our goal of approximately zero," she added.

Following the better-than-expected earnings performance, HP's stock price jumped 13 per cent to $24.01 in after-hours trading last night. Tom Reuner, principal analyst at Ovum, claimed that the results provided evidence that Whitman has improved operational efficiency. But he cautioned that her turnaround plan has another four years to run and that the low margins inherent in the PC market still present a structural challenge.

"HP's suggested shift to a new style of IT that encompasses mobile, social, big data and cloud is not yet central to the restructuring of HP," added Reuner. "The focus is rather on improving operational efficiency. While the new style of IT will help to redefine HP's strategy in the medium to long term, the company needs to refine its communications around how it will differentiate around these industry trends."