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HP INC (HPQ)·Q4 2016 Earnings Summary

Executive Summary

  • Q4 revenue was $12.5B, up 2% YoY (up 4% in constant currency), with non-GAAP EPS of $0.36 (within guidance) and GAAP EPS of $0.30 (above guidance on lower restructuring and net tax indemnification credit) .
  • Personal Systems grew 4% YoY with 4.3% segment operating margin; Printing declined 8% YoY with 14.0% margin as supplies were down 12% and the model change reduced channel inventory (≈7pts impact YoY) .
  • Cash conversion cycle remained strong at negative 29 days (flat seq., -10 days YoY); free cash flow was $0.56B in Q4 and 72% of FY16 FCF returned to shareholders .
  • FY17 EPS guidance maintained: GAAP $1.47–$1.57 and non-GAAP $1.55–$1.65; Q1 FY17 EPS guidance GAAP $0.33–$0.36 and non-GAAP $0.35–$0.38 .
  • S&P Global consensus estimates were unavailable; comparisons to Wall Street estimates cannot be provided (S&P Global data not accessible at time of request).

What Went Well and What Went Wrong

What Went Well

  • Personal Systems achieved the “trifecta”: revenue and share gains with margin expansion driven by premium/gaming/commercial offerings; global PC share reached 21.4% with record commercial share at 24.8% .
  • Print hardware units grew YoY for the first time in several quarters; commercial hardware units +10% YoY; graphics delivered a record revenue quarter and 13th consecutive quarter of constant currency growth .
  • Operational discipline: negative 29-day cash conversion cycle; Q4 FCF of $0.56B; FY16 FCF of $2.8B with 72% returned to shareholders .

Selected quote: “We delivered on our full year financial commitments and executed well on our strategy to protect our core, drive growth and invest in our future…” — Dion Weisler, CEO .

What Went Wrong

  • Printing margin compressed to 14.0% (from 20.4% in Q3) as supplies revenue fell 12% YoY and the sales model transition lacked the prior quarter’s software divestiture gains .
  • GAAP net earnings and EPS declined sharply YoY on one-time items (defined benefit plan settlement charges; tax impacts), with GAAP EPS $0.30 vs $0.83 in Q4 FY15 .
  • Component shortages (LCD, DRAM, Flash) expected to persist, pressuring near-term Personal Systems profitability; macro/FX uncertainty (strong USD) cited as ongoing risk .

Financial Results

MetricQ1 2016Q2 2016Q3 2016Q4 2016
Revenue ($USD Billions)$12.2 $11.6 $11.9 $12.51
GAAP Diluted EPS - Continuing Ops ($)$0.36 $0.38 $0.49 $0.30
Non-GAAP Diluted EPS ($)$0.36 $0.41 $0.48 $0.36
Gross Margin (%)18.7% 19.4% 18.3% 18.3%

Segment breakdown (YoY and QoQ context):

Segment MetricQ4 2015Q3 2016Q4 2016
Personal Systems Revenue ($B)$7.69 $7.51 $8.02
Printing Revenue ($B)$4.97 $4.42 $4.56
Personal Systems Operating Margin (%)3.7% 4.4% 4.3%
Printing Operating Margin (%)16.9% 20.4% 14.0%

KPIs:

KPIQ1 2016Q2 2016Q3 2016Q4 2016
Cash Conversion Cycle (days)-15 -24 -29 -29
Net Cash from Operations ($B)-$0.11 $1.60 $1.10 $0.70
Free Cash Flow ($B)-$0.23 $1.50 $1.00 $0.56

Notes:

  • Q4 revenue growth: +2% YoY (+4% cc) .
  • GAAP EPS beat vs guidance ($0.30 vs $0.22–$0.25) on lower restructuring and net tax indemnification credit; non-GAAP EPS within $0.34–$0.37 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
GAAP Diluted EPSQ1 FY2017$0.33–$0.36 $0.33–$0.36 Maintained
Non-GAAP Diluted EPSQ1 FY2017$0.35–$0.38 $0.35–$0.38 Maintained
GAAP Diluted EPSFY2017$1.47–$1.57 $1.47–$1.57 Maintained
Non-GAAP Diluted EPSFY2017$1.55–$1.65 $1.55–$1.65 Maintained

Clarifications:

  • Non-GAAP outlook excludes items including restructuring, plan settlement charges/credits, non-operating retirement-related items, acquisition-related charges, amortization, tax indemnification/valuation allowance effects .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 & Q3 FY2016)Current Period (Q4 FY2016)Trend
Personal Systems execution and market shareQ2: Outperformed market; premium/gaming momentum; PS OP 3.5% . Q3: Trifecta with revenue/share/margin; PS OP 4.4%; strong premium attach .Continued trifecta; global share record (21.4% overall, 24.8% commercial); component shortages expected to pressure near-term margins .Improving topline; near-term margin pressure risk.
Supplies model change and stabilization pathQ2: Supplies -10% cc; ~7pts channel reduction; stabilization by end-2017 reiterated . Q3: Supplies -13% cc; ~7pts channel reduction; OP boosted by software gains; stabilization reiterated .Supplies -12% YoY; model change contributed ~7pts decline; significant channel inventory reduction achieved; stabilization by end-2017 cc reiterated .Stabilizing trajectory; execution on inventory reduction.
Printing margins and mixQ2: Print OP 17.3%; divestiture gains offset channel reductions . Q3: Print OP 20.4%; benefited from software asset sale; warned Q4 OP ~14% .Print OP 14.0%, as expected; supplies pressure and higher R&D for A3/3D offset operational improvements .Down sequentially; normalizing mid-teens run-rate.
A3 copier strategy and Samsung printer acquisitionQ2: Preparing A3 portfolio; building go-to-market . Q3: Emphasized NPV-positive unit placement; planning A3 .Acquisition integration on track; 6,500 patents; A3 portfolio launches begin Q2; strong channel interest .Positive strategic progress.
3D printing initiativesQ2: Launched Jet Fusion; 10x speed, half cost; built ecosystem (Nike, BMW, J&J, Siemens) . Q3: Continued emphasis on future growth .First installations with Materialise, Jabil, Shapeways imminent; materials partners BASF, Evonik committing .Building momentum and ecosystem.
Macro/FX and competitive dynamics (yen)Q2: Pricing discipline; uncertain FX impacts; hedging . Q3: Uncertain macro; Brexit risks; FX impacts supplies demand; Japanese pricing behavior unclear .Strong USD; competitive pricing impacts uncertain; guidance assumes no change in pricing environment vs FY16 .Ongoing uncertainty.

Management Commentary

  • Strategic posture: “We are confident in our abilities to execute and deliver, while making business decisions focused on the long-term success for the company.” — Dion Weisler, CEO .
  • Segment focus: “Personal Systems delivered the trifecta… each delivered topline growth despite an overall tough and competitive market.” — Dion Weisler, CEO .
  • Printing trajectory: “We continue to be disciplined in our hardware unit pricing… exited the second half with the significant reduction in supplies channel inventory in line with our outlook.” — Dion Weisler, CEO .
  • Financial framing: “Gross margin of 18.3% was down 1 point YoY… Non-GAAP operating expenses of $1.4B down 8% YoY… delivered non-GAAP diluted EPS of $0.36.” — Cathie Lesjak, CFO .
  • Guidance: “Q1 2017 non-GAAP diluted EPS is in the range of $0.35 to $0.38… full year fiscal 2017 non-GAAP diluted EPS remains $1.55 to $1.65.” — Cathie Lesjak, CFO .

Q&A Highlights

  • Component shortages and margin flow-through: Management is leveraging the balance sheet to secure LCD/DRAM/Flash; competitive pricing and holiday seasonality limited margin upside despite revenue strength in PCs .
  • Supplies trajectory and modeling: The Four Box model indicated -3% to -4% constant-currency demand; Q1 FY17 supplies expected mid-single-digit decline due to unit placement dynamics; stabilization still targeted by end-2017 .
  • Printing margins normalization: Q4 print OP of ~14% was in line with prior commentary; Q3’s 20.4% benefited from software gains; FY run-rate mid-teens consistent with history .
  • A3 acquisition and channel: Samsung integration tracking to close in 9–12 months; strong global channel interest for HP’s new A3 MFP portfolio .
  • Macro/FX/policy risk: Too early to assess U.S. policy impacts (taxes/tariffs); outlook assumes no change in competitor pricing behavior despite yen moves .

Estimates Context

  • S&P Global Wall Street consensus EPS and revenue estimates for Q4 FY2016, Q3 FY2016, and Q1 FY2016 were unavailable at the time of this analysis due to data access limits. As a result, explicit comparisons to consensus cannot be provided. HP’s Q4 GAAP EPS of $0.30 was above its prior guidance ($0.22–$0.25), and non-GAAP EPS of $0.36 was within guidance ($0.34–$0.37) .

Key Takeaways for Investors

  • Personal Systems momentum and share gains continue, driven by premium, gaming, and commercial mobility; watch margin resilience amid component shortages and holiday mix .
  • Printing margins normalized to 14% as expected; supplies model transition is executing (inventory reduced; price discipline), but trajectory remains non-linear through 1H FY17 .
  • Strong cash discipline (negative 29-day CCC) and FCF conversion underpin capital returns; HP returned 72% of FY16 FCF to shareholders .
  • FY17 EPS guidance maintained; near-term Q1 guide implies continued supplies headwinds offset by productivity and restructuring savings .
  • Strategic catalysts: A3 copier entry (Samsung acquisition closing expected 2H FY17) and 3D printing installations/materials ecosystem expansion offer medium-term optionality .
  • Macro/FX risk persists (strong USD; competitive pricing behavior uncertain), particularly for supplies; monitor updates on pricing dynamics and channel inventory ranges .
  • Actionable: Bias long-term to segments with differentiated innovation (OMEN X, Elite x3, A3 MFPs, Jet Fusion) while trading around near-term print margin/ supplies volatility and component supply constraints .