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HP Inc Falls on Soft FY17 Earnings View & New Job Cut Plan


Shares of HP Inc. HPQ were down 1.3% during yesterday’s extended trading hours, following the company’s release of its non-GAAP earnings outlook for fiscal 2017, which was lower than the Zacks Consensus Estimate. In addition, the announcement of a second round of job cuts this year, in an effort to reduce costs amid declining demand for PC and printers, did not go well with investors.

Fiscal 2017 Outlook

Yesterday, at its Analyst Meeting in New York, the company revealed that it expects to generate earnings per share in the range of $1.55 to $1.65 (midpoint: $1.60). At its midpoint, however, the guidance fell short of the Zacks Consensus Estimate of $1.61 by a penny.

On a GAAP basis, HP Inc. projects earnings to range between $1.47 and $1.57 per share (mid-point $1.52). During the fiscal year, the company expects to generate operating cash flow in the range of $2.8 billion to $3.1 billion.

It projects capital expenditure of $0.5 billion. Free cash flow is anticipated to be between $2.3 billion and $2.6 billion.

Keeping up with its strategy of boosting shareholder wealth, the company announced that it is planning to distribute 50% to 70% of its available fiscal 2017 free cash flow in the form of dividend and share repurchases.

HP Inc. further revealed its plan of increasing the annual dividend by 7% to 13 cents per share in the next fiscal year. It also announced an additional share repurchase program worth $3 billion, although a time limit for completing the same has not been set.

Headcount Reduction

In addition to revising its fiscal 2017 outlook, HP Inc. revealed that it is planning to trim its employee count by 3,000 to 4,000 across different levels over the next three years, that is, from fiscal 2017 through fiscal 2019. This announcement is likely part of HP Inc.’s ongoing restructuring plan.

It should be noted that the new job cut is in addition to the company’s planned job cut of 3,000 employees by the end of fiscal 2016, which was announced this February. Currently, HP Inc. has approximately 50,000 employees.

HP Inc. expects the recently announced job cut to generate annualized cost savings of approximately $200 million to $300 million from fiscal 2020 onward. The company anticipates incurring one-time charges in the range of $350 million to $500 million associated with the job cut.

Restructuring Initiative

Since its split from Hewlett-Packard Company last November, HP Inc. has been trying to stabilize declining sales and eroding profits through a series of restructuring initiatives. The company has been witnessing a secular decline in demand for PC and printers due to the ongoing shift toward tablets and smartphones a space where it is yet to gain foothold.

As part of its restructuring initiatives, the company has divested its content management software tools and Customer Communications Management (CCM) assets to Open Text Corporation, a move which will facilitate business realignment and allow it to focus on the PC and printing businesses. Apart from this, it will also facilitate cost reduction and enhanced productivity, thereby helping the company boost profitability.

Furthermore, post the split, HP Inc. has been focused on product innovation and differentiation to maintain its leading position in the space. Keeping with this, during third-quarter fiscal 2016, the company launched EliteBook Folio, the world's thinnest and lightest business class notebook.

Meanwhile, the company is also undertaking pricing actions, and marketing and sales activities in a bid to drive demand, thus giving some price stability to the market. Moreover, HP Inc. is trying to shift its product mix to the high end and move away from the low- and negative-margin businesses.

The impact of these efforts was reflected clearly in the company’s last earnings release, wherein the Personal Systems segment witnessed stabilization to a certain extent, and even recorded a slight year-over-year improvement after several quarters.

The company’s efforts to revamp the printing business have also been commendable. Note that HP Inc. has recently signed a deal to acquire Samsung Electronics’ printer business for a purchase price of $1.05 billion.

The acquisition is a strategic fit for HP as it will be able to expand the company’s printing business with the addition of 6,500-plus printing patents owned by Samsung. The move will offer support to the development and manufacturing of HP printers, going forward.

In addition, the company is now focusing on enhancing its 3D printing business capabilities in an effort to revive tumbling sales. Note that even though HP has been operating in this space for almost five years now, it still lags behind 3D Systems Corporation DDD and Stratasys Ltd. SSYS.

Thus, in order to fortify its presence in the market, HP recently unveiled its Jet Fusion 3D Printing Solution, with two models to choose from – 4200 and 3200. Unlike 3D Systems and Stratasys, which target all kinds of consumers, HP Inc. is emphasizing only on industrial markets because of their ability to afford a premium range of 3D printing solutions.

To satisfy customers in this space, HP Inc. inked collaborations with the likes of BMW, Nike NKE and Autodesk in order to develop more advanced 3D printing technologies for diverse industrial uses.

Bottom Line

HP Inc.’s efforts to turn around the business have been commendable. The company has adopted a strategy of focusing on product innovations and differentiation as well as on enhancing the printing business’ capabilities, which will help stabilize the top line. On the other hand, its headcount reduction and focusing on high-end product mix initiatives will drive its bottom-line results in the long run.

The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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