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HP Reports Fiscal 2015 Third Quarter Results




PALO ALTO, CA — (Marketwired) — 08/20/15 — HP (NYSE: HPQ)

Third quarter net revenue of $25.3 billion

Third quarter non-GAAP diluted net earnings per share of $0.88, versus the previously provided outlook of $0.83 to $0.87 per share

Third quarter GAAP diluted net earnings per share of $0.47, versus the previously provided outlook of $0.50 to $0.54 per share

Third quarter cash flow from operations of $1.7 billion

Returned $670 million to shareholders in the form of share repurchases and dividends in the third quarter

Information about HP–s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below.

HP today announced financial results for its fiscal 2015 third quarter ended July 31, 2015.

Third quarter net revenue of $25.3 billion was down 8% from the prior-year period and down 2% on a constant currency basis.

Third quarter GAAP diluted net earnings per share (EPS) was $0.47, down from $0.52 in the prior-year period and below its previously provided outlook of $0.50 to $0.54. Third quarter non-GAAP diluted net EPS was $0.88, down from to $0.89 in the prior-year period and above its previously provided outlook of $0.83 to $0.87. Third quarter non-GAAP net earnings and non-GAAP diluted net EPS exclude after-tax costs of $750 million and $0.41 per diluted share, respectively, related to separation costs, the amortization of intangible assets, impairment of data center assets, defined benefit plan settlement charges, acquisition-related charges and restructuring charges.

On July 1, Hewlett Packard Enterprise filed an initial Registration Statement on Form 10 with the Securities and Exchange Commission (SEC), an important step in the separation process. The filing provides detailed information on the business and historical financial results of Hewlett Packard Enterprise. On August 10, HP filed the first amendment to the Form 10, which included the pro forma cash and debt levels for Hewlett Packard Enterprise.

With the Hewlett Packard Enterprise capital structure determined, credit ratings agencies published expected investment grade ratings for both Hewlett Packard Enterprise and HP Inc., which is in line with our objectives.

On August 12, HP introduced the expected members of the boards of directors for both Hewlett Packard Enterprise and HP Inc., effective upon the completion of the separation. Each board will include members of the current HP board, as well as several new directors chosen after a comprehensive review of personal and professional qualifications as they relate to the specific needs of the two new companies.

“HP delivered results in the third quarter that reflect very strong performance in our Enterprise Group and substantial progress in turning around Enterprise Services,” said Meg Whitman, chairman, president and chief executive officer, HP. “I am very pleased that we have continued to deliver the results we said we would, while remaining on track to execute one of the largest and most complex separations ever undertaken.”

For the fiscal 2015 fourth quarter, HP estimates non-GAAP diluted net EPS to be in the range of $0.92 to $0.98 and GAAP diluted net EPS to be in the range of $0.12 to $0.18. Fiscal 2015 fourth quarter non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.80 per share, related to separation costs, the amortization of intangible assets, restructuring charges, defined benefit plan settlement charges and acquisition-related charges.

For fiscal 2015, HP estimates non-GAAP diluted net EPS to be in the range of $3.59 to $3.65 and GAAP diluted net EPS to be in the range of $1.87 to $1.93. Fiscal 2015 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.72 per share, related to separation costs, the amortization of intangible assets, restructuring charges, defined benefit plan settlement charges, impairment of data center assets and acquisition-related charges.

HP generated $1.7 billion in cash flow from operations in the third quarter, down 54% from the prior-year period. Inventory ended the quarter at $6.7 billion, up 4 days year over year to 31 days. Accounts receivable ended the quarter at $12.8 billion, down 1 day year over year to 45 days. Accounts payable ended the quarter at $15.5 billion, up 7 days year over year to 72 days. HP–s dividend payment of $0.176 per share in the third quarter resulted in cash usage of $318 million. HP also utilized $352 million of cash during the quarter to repurchase approximately 11.0 million shares of common stock in the open market. HP exited the quarter with $17.4 billion in gross cash, where gross cash includes cash and cash equivalents, short-term investments and certain long-term investments.

was down 13% year over year with a 3.0% operating margin. Commercial revenue decreased 9% and Consumer revenue decreased 22%. Total units were down 11% with Notebooks units down 3% and Desktops units down 20%.

revenue was down 9% year over year with a 17.8% operating margin. Total hardware units were down 2% with Commercial hardware units down 6% and Consumer hardware units flat. Supplies revenue was down 6%.

revenue was up 2% year over year with a 13.0% operating margin. Industry Standard Servers revenue was up 8%, Storage revenue was down 2%, Business Critical Systems revenue was down 21%, Networking revenue was up 22% and Technology Services revenue was down 9%.

revenue was down 11% year over year with a 6.0% operating margin. Infrastructure Technology Outsourcing revenue was down 13%, and Application and Business Services revenue declined 7%.

revenue was down 6% year over year with a 20.6% operating margin. License revenue was down 11%, support revenue was down 3%, professional services revenue was down 8% and software-as-a-service (SaaS) revenue was down 4%.

revenue was down 6% year over year with a 2% decrease in net portfolio assets and a 2% decrease in financing volume. The business delivered an operating margin of 10.8%.

More information on HP–s earnings, including additional financial analysis and an earnings overview presentation, is available on HP–s Investor Relations website at .

HP–s FY15 Q3 earnings conference call is accessible via an audio webcast at .

HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. With the broadest technology portfolio spanning printing, personal systems, software, services and IT infrastructure, HP delivers solutions for customers– most complex challenges in every region of the world. More information about HP (NYSE: HPQ) is available at .

To supplement HP–s consolidated condensed financial statements presented on a generally accepted accounting principles (GAAP) basis, HP provides revenue on a constant currency basis, as well as non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash financial measures. HP also provides forecasts of non-GAAP diluted net earnings per share. A reconciliation of the adjustments to GAAP results for this quarter and prior periods is included in the tables below or elsewhere in the materials accompanying this news release. In addition, an explanation of the ways in which HP–s management uses these non-GAAP measures to evaluate its business, the substance behind HP–s decision to use these non-GAAP measures, the material limitations associated with the use of these non-GAAP measures, the manner in which HP–s management compensates for those limitations, and the substantive reasons why HP–s management believes that these non-GAAP measures provide useful information to investors is included under “Use of non-GAAP financial measures” after the tables below. This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for revenue, operating profit, operating margin, net earnings, diluted net earnings per share, cash and cash equivalents, cash flow from operations, capital expenditures, or total company debt prepared in accordance with GAAP.

This news release contains 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 and assumptions.

All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, effective tax rates, net earnings, net earnings per share, cash flows, benefit plan funding, share repurchases, currency exchange rates or other financial items; any projections of the amount, timing or impact of cost savings or restructuring charges; any statements of the plans, strategies and objectives of management for future operations, including the previously announced separation transaction and the future performances of the post-separation companies if the separation is completed, as well as the execution of restructuring plans and any resulting cost savings or revenue or profitability improvements; any statements concerning the expected development, performance, market share or competitive performance relating to products or services; any statements regarding current or future macroeconomic trends or events and the impact of those trends and events on HP and its financial performance; any statements regarding pending investigations, claims or disputes; any statements of expectation or belief; and any statements or assumptions underlying any of the foregoing.

Risks, uncertainties and assumptions include the need to address the many challenges facing HP–s businesses; the competitive pressures faced by HP–s businesses; risks associated with executing HP–s strategy, including the planned separation transaction; the impact of macroeconomic and geopolitical trends and events; the need to manage third-party suppliers and the distribution of HP–s products and the delivery of HP–s services effectively; the protection of HP–s intellectual property assets, including intellectual property licensed from third parties; risks associated with HP–s international operations; the development and transition of new products and services and the enhancement of existing products and services to meet customer needs and respond to emerging technological trends; the execution and performance of contracts by HP and its suppliers, customers and partners; the hiring and retention of key employees; integration and other risks associated with business combination and investment transactions; the execution, timing and results of the separation transaction or restructuring plans, including estimates and assumptions related to the cost (including any possible disruption of HP–s business) and the anticipated benefits of implementing the separation transaction and restructuring plans; the resolution of pending investigations, claims and disputes; and other risks that are described in HP–s Annual Report on Form 10-K for the fiscal year ended October 31, 2014, and HP–s other filings with the Securities and Exchange Commission, including HP–s Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2015.

As in prior periods, the financial information set forth in this release, including tax-related items, reflects estimates based on information available at this time. While HP believes these estimates to be reasonable, these amounts could differ materially from reported amounts in HP–s Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2015. HP assumes no obligation and does not intend to update these forward-looking statements.

To supplement HP–s consolidated condensed financial statements presented on a GAAP basis, HP provides revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash. HP also provides forecasts of non-GAAP diluted net earnings per share.

These non-GAAP financial measures are not computed in accordance with, or as an alternative to, generally accepted accounting principles in the United States. The GAAP measure most directly comparable to revenue on a constant currency basis is revenue. The GAAP measure most directly comparable to non-GAAP operating profit is earnings from operations. The GAAP measure most directly comparable to non-GAAP earnings from operations is earnings from operations. The GAAP measure most directly comparable to non-GAAP operating margin is operating margin. The GAAP measure most directly comparable to non-GAAP net earnings is net earnings. The GAAP measure most directly comparable to non-GAAP diluted net earnings per share is diluted net earnings per share. The GAAP measure most directly comparable to gross cash is cash and cash equivalents. The GAAP measure most directly comparable to free cash flow is cash flow from operations. The GAAP measure most directly comparable to net capital expenditures is capital expenditures. The GAAP measure most directly comparable to net debt and operating company net debt is total company debt. The GAAP measure most directly comparable to each of net cash and operating company net cash is cash and cash equivalents. Reconciliations of each of these non-GAAP financial measures to GAAP information are included in the tables above or elsewhere in the materials accompanying this news release.

Revenue on a constant currency basis assumes no change in the foreign exchange rate from the prior-year period. Non-GAAP operating profit and non-GAAP operating margin are defined to exclude the effects of any charges relating to the amortization of intangible assets, restructuring charges, charges relating to the separation transaction, acquisition-related charges, impairment of data center assets and defined benefit plan settlement charges. Non-GAAP net earnings and non-GAAP diluted net earnings per share consist of net earnings or diluted net earnings per share excluding those same charges. In addition, non-GAAP net earnings and non-GAAP diluted net earnings per share are adjusted by the amount of additional taxes or tax benefits associated with each non-GAAP item. HP–s management uses these non-GAAP financial measures for purposes of evaluating HP–s historical and prospective financial performance, as well as HP–s performance relative to its competitors. HP–s management also uses these non-GAAP measures to further its own understanding of HP–s segment operating performance. HP believes that excluding the items mentioned above from these non-GAAP financial measures allows HP–s management to better understand HP–s consolidated financial performance in relation to the operating results of HP–s segments, as HP–s management does not believe that the excluded items are reflective of ongoing operating results. More specifically, HP–s management excludes each of those items mentioned above for the following reasons:

HP incurs charges relating to the amortization of intangible assets. Those charges are included in HP–s GAAP earnings from operations, operating margin, net earnings and diluted net earnings per share. Such charges are significantly impacted by the timing and magnitude of HP–s acquisitions and any related impairment charges. Consequently, HP excludes these charges for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP–s current operating performance and comparisons to HP–s operating performance in other periods.

Restructuring charges are costs associated with a formal restructuring plan and are primarily related to (i) employee termination costs and benefits and (ii) costs to vacate duplicative facilities. HP excludes these restructuring costs (and any reversals of charges recorded in prior periods) for purposes of calculating these non-GAAP measures because it believes that these historical costs do not reflect expected future operating expenses and do not contribute to a meaningful evaluation of HP–s current operating performance or comparisons to HP–s operating performance in other periods.

Separation costs are expenses associated with HP–s plan to separate into two independent publicly-traded companies. The charges are primarily related to third-party consulting, contractor fees and other incremental costs incurred to complete the separation. HP excludes these separation costs for purposes of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP–s current operating performance and comparisons to HP–s operating performance in other periods.

HP incurs cost related to its acquisitions, most of which are treated as non-cash or non-capitalized expenses. The charges are direct expenses such as professional fees and retention costs, as well as non-cash adjustments to the fair value of certain acquired assets such as inventory. Because non-cash or non-capitalized acquisition-related expenses are inconsistent in amount and frequency and are significantly impacted by the timing and nature of HP–s acquisitions, HP believes that eliminating such expenses for purposes of calculating these non-GAAP measures facilitates a more meaningful evaluation of HP–s current operating performance and comparisons to HP–s past operating performance.

HP incurs impairment charges related to its exit from certain data centers. Such charges are inconsistent in amount and frequency. HP believes that eliminating these amounts for purposes of calculating non-GAAP operating profit facilitates a more meaningful evaluation of HP–s current operating performance and comparisons to HP–s operating performance in other periods.

HP incurs defined benefit settlement charges relating to the U.S. HP pension plan. The charges are associated with the net settlement and remeasurement resulting from voluntary lump sum payments offered to certain terminated vested participants. HP excludes these charges for the purpose of calculating these non-GAAP measures to facilitate a more meaningful evaluation of HP–s current operating performance and comparisons to HP–s operating performance in other periods.

Gross cash is a non-GAAP measure that is defined as cash and cash equivalents plus short-term investments and certain long-term investments that may be liquidated within 90 days pursuant to the terms of existing put options or similar rights. Free cash flow is defined as cash flow from operations less net capital expenditures. Net capital expenditures is defined as investments in property, plant and equipment less proceeds from the sale of property, plant and equipment. HP–s management uses gross cash and free cash flow for the purpose of determining the amount of cash available for investment in HP–s businesses, funding acquisitions, repurchasing stock and other purposes. HP–s management also uses gross cash and free cash flow to evaluate HP–s historical and prospective liquidity. Because gross cash includes liquid assets that are not included in GAAP cash and cash equivalents, HP believes that gross cash provides a more accurate and complete assessment of HP–s liquidity. Because net capital expenditures includes proceeds from the sale of property, plant and equipment, HP believes that net capital expenditures provides a more accurate and complete assessment of HP–s liquidity. Because free cash flow includes the effect of net capital expenditures that are not reflected in GAAP cash flow from operations, HP believes that free cash flow provides a more accurate and complete assessment of HP–s liquidity and capital resources.

Total company net debt consists of total debt (including the effects of hedging) less gross cash, which includes cash and cash equivalents, short-term investments, and certain liquid long-term investments. Total company net cash consists of gross cash less total debt. HP Financial Services (HPFS) net debt consists of HPFS debt, which includes primarily intercompany equity that is treated as debt for segment reporting purposes, intercompany debt, and borrowing and funding related activity associated with HPFS and its subsidiaries, less HPFS cash. Total company net debt and total company net cash provide useful information to HP–s management about the state of HP–s consolidated condensed balance sheet. Operating company net debt is a non-GAAP measure that is defined as total company net debt less HPFS net debt. Operating company net cash is a non-GAAP measure that is defined as total company net cash less HPFS net debt. Operating company net debt and operating company net cash provide additional useful information to HP–s management about the state of HP–s consolidated condensed balance sheet by providing more transparency into the financial components of the operating company separate from HP–s financing business, which has different capital structure requirements and requires much greater leverage to run effectively.

These non-GAAP financial measures have limitations as analytical tools, and these measures should not be considered in isolation or as a substitute for analysis of HP–s results as reported under GAAP. Some of the limitations in relying on these non-GAAP financial measures are:

Items such as amortization of intangible assets, though not directly affecting HP–s cash position, represent the loss in value of intangible assets over time. The expense associated with this loss in value is not included in non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings or non-GAAP diluted net earnings per share, and therefore does not reflect the full economic effect of the loss in value of those intangible assets.

Items such as restructuring charges and separation costs that are excluded from non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings and non-GAAP diluted net earnings per share can have a material impact on the equivalent GAAP earnings measure and cash flows.

HP may not be able to immediately liquidate the short-term and long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure.

Other companies may calculate revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash differently than HP does, limiting the usefulness of those measures for comparative purposes.

HP compensates for the limitations on its use of non-GAAP financial measures by relying primarily on its GAAP results and using non-GAAP financial measures only supplementally. HP also provides robust and detailed reconciliations of each non-GAAP financial measure to its most directly comparable GAAP measure within this news release and in other written materials that include these non-GAAP financial measures, and HP encourages investors to review carefully those reconciliations.

HP believes that providing revenue on a constant currency basis, non-GAAP operating profit, non-GAAP operating margin, non-GAAP net earnings, non-GAAP diluted net earnings per share, gross cash, free cash flow, net capital expenditures, net debt, net cash, operating company net debt and operating company net cash to investors in addition to the related GAAP measures provides investors with greater transparency to the information used by HP–s management in its financial and operational decision making and allows investors to see HP–s results “through the eyes” of management. HP further believes that providing this information better enables HP–s investors to understand HP–s operating performance and to evaluate the efficacy of the methodology and information used by HP–s management to evaluate and measure such performance. Disclosure of these non-GAAP financial measures also facilitates comparisons of HP–s operating performance with the performance of other companies in HP–s industry that supplement their GAAP results with non-GAAP financial measures that may be calculated in a similar manner.

© 2015 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice. HP shall not be liable for technical or editorial errors or omissions contained herein.

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