Five key takeaways from HP and HPE's Q1 figures
We delve into the results from HP and HPE's first quarter
HP Inc's shares surged by 5.4 per cent in after-hours trading to $22.53 (£16.11), while HPE's leapt by as much as 19 per cent on Thursday evening.
We take a look at why HP and HPE's Q1 numbers impressed shareholders.
HP Inc is still outpacing HPE, but only just
HP's revenues shot up by 13 per cent year on year in constant currencies to $14.5bn during Q1, outpacing HPE's nine per cent growth during the quarter to $7.7bn.
This marks the fifth consecutive quarter in which HPE has been outgunned in terms of revenue growth by its PC and printer-shifting stablemate. The last time HPE outperformed HP was when both firms rounded off their first solo years with declining revenues, though HPE's declined slightly less.
HP's Personal Systems revenues, which include notebooks, desktops and workstations, shot up by 13 per cent in constant currencies, achieving a 3.6 per cent operating margin, while printing sales logged 12 per cent growth in constant currencies, with a 15.8 per cent operating margin.
Desktop sales increased by 17 per cent to $2.96bn, while notebooks jumped by 14 per cent to $5.6bn. On the printer side, commercial hardware sales swelled by 28 per cent to $1.1bn, and consumer hardware sales grew by 11 per cent to $655m.
Storage is booming for HPE
HPE, which is using a new method of grouping its product categories for the first time in Q1, saw its hybrid IT revenues surge by 11 per cent to $6.3bn.
Hybrid IT covers compute, storage, datacentre networking and Pointnext. Storage sales surged by 24 per cent annually to $948m in Q1, with its acquisition of Nimble a major driver.
CFO Tim Stonesifer claims that year-on-year growth in storage will unlikely be sustained for the rest of the year, however.
"Particularly in the back half of the year as you recall last year, we had a big ramp in revenue in the back half of 2017. So as we get into 2018, that's going to be a tough compare. The other thing to take into account is that backlogs will normalise and as they return to more normalised levels that will have an impact as well," he said on an earnings call transcribed by Seeking Alpha.
Neri will plough on with cost saving as CEO
HPE made a GAAP loss of $224m in its previous quarter. "Transformation costs", as part of its restructure plan to save $1.5bn over the next three years, put a $328m strain on HPE's bottom line, with an additional $202m going into "separation costs".
For its first fiscal quarter, restructuring again took a toll on HPE's profits. Some $226m was spent on restructuring during the quarter as CEO Antonio Neri begins to make headway with his HPE Next programme.
The chief executive, however, claimed that the cost cutting has so far had no material impact on the firm's business operations and he is optimistic about its progress.
"We expect HPE Next to deliver the results we laid out in October. We have completed several critical parts of the programme, including the sales force transformation, which significantly reduces the… layers between the CEO and the frontline, and streamlines a number of sales compensation plans. The fact that we were able to deliver the results we did in Q1 is evidence of our ability to execute HPE Next without disrupting the business," he said.
"I'm pleased with the first-quarter performance where we executed well with no disruption. But this is an opportunity for me as the new CEO to establish a new culture as we transform the company, and to really architect the company from the ground up with a clean-sheet approach. And this is going to change the culture of the company."
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Five key takeaways from HP and HPE's Q1 figures
We delve into the results from HP and HPE's first quarter
PCs are getting more expensive as component price rise continues into 2018
HP Inc CEO Dion Weisler said a PC component shortage and price rise that occurred last year will continue into 2018, causing PC vendors to adjust their pricing models. The CEO said PC prices have become more expensive, but the change has not had an impact on customer demand.
"Some of the dynamics that are going on are ASPs are up. They're up because we've been repricing, in the market. The rest of the market has been repricing for commodity cost increases. But they're also up because we're getting a really nice mix shift to higher-end products, higher price and better margins. That is also helping with [the balance between] revenue [and] units.
CFO Catherine Lesjak added: "We now expect to see increased component costs throughout FY2018, and therefore are mitigating via pricing, supply chain scale and leveraging our balance sheet, driving positive mix shift and currency favorability. Together, these actions should enable us to offset some of the commodity cost increases."
US tax reforms are a boon for HP and HPE
HPE's expensive restructuring however was saved by the US' recent tax reform, which handed the firm an extra $2.2bn, meaning earnings per share for the firm were $0.34 above the $0.20 to $0.24 expected for the quarter.
HP Inc meanwhile recorded a provisional $1.1bn net gain stemming from the US tax reform. Earnings per share were up $0.10 to $0.48 for the quarter.
Weisler said the tax reform will benefit employees and shareholders alike.
"We expect tax reform to benefit HP's stakeholders and are planning for a lower go-forward effective tax rate. We believe this will help us drive higher net earnings, strengthen our balance sheet and increase our near-term shareholder return opportunities," he said.
"We expect it will also create capacity for us to invest in our business, including incremental investments in our workforce. We intend to use a portion of our annual tax savings to invest back into our non-executive employees by increasing their ongoing annual variable performance bonus opportunity."