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Hewlett-Packard Company (HPQ) reported second quarter 2011 earnings per share (EPS) of $1.24, exceeding the Zacks Consensus Estimate of $1.21. However, revenue of $31.6 billion exceeding the Zacks Consensus Estimate of $31.5 billion.

Revenues

Revenues increased 3.0% to $31.6 billion reported in the year-ago period, and up 1.0% on a constant currency basis. The company reported broad-based revenue growth across all its segments except the Personal Systems Group.

Moreover, the company’s performance was also driven by the strength in the commercial sector as businesses continued to spend on technology. On the flipside, the volatility in consumer performance across its products, coupled with continued tepid business in consumer PCs across all geographies.

On a geographical basis, the Americas reported a 2% increase in revenue. Decrease of 1.0% was recorded in Europe, Middle East and Africa, while the Asia/Pacific was up 10.0%. International markets accounted for 66.0% of total revenue in the first quarter, with revenues in the BRIC countries (Brazil, Russia, India and China) increasing 19% on a year-over-year basis and comprising 12% of total revenue.

Results and Analysis by Segments

HP Enterprise Business (HEB) reported revenues of $15.3 billion, up 6.7% from $14.3 billion in the year-ago quarter. This includes Enterprise Storage and Server revenues, which increased 15.0% year over year. The company delivered a good quarter, with HP’s innovative converged infrastructure products getting the centre stage. Moreover, the company also gained impetus in cloud with strong interest for the newly-launched HP Cloud System.

Personal Systems Group (PSG) revenues were $9.4 billion, down 5.0% year over year, mainly attributable to a decline in the consumer client revenue of 23.0% in the quarter.

Imaging and Printing Group (IPG) revenues were $6.7 billion, up 5.0% year over year. The increase was led by strong performance across the business with share gains in all printing categories and 41.0% year-over-year growth in commercial printer hardware units. The company launched the new ePrint platform, graphic arts and other commercial print solutions.

HP Financial Services (HPFS) revenues were $885.0 million, up 17.0% year over year. Financial Services growth was driven by both double-digit growth in lease volume and a healthy improvement in portfolio assets.

Operating Results

Gross margin in the quarter was 24.6%, up from 23.6% reported in the year-ago period. The increase is attributable to a favorable mix of HP Enterprise & Personal Systems Group products. Operating margin remained flat at 11.0% compared to the year-ago quarter, as the company was able to implement decent cost control measures.

Diluted earnings per share on a GAAP basis were $1.05 in the second quarter compared with 91 cents in the prior-year quarter. Financial information on a non-GAAP basis excludes after-tax costs related primarily to the restructuring and acquisition-related charges. Excluding the above mentioned items, the non-GAAP EPS was $1.24, compared to $1.09 cents in the prior-year quarter.

Balance Sheet, Cash Flow & Stock Repurchase

Hewlett-Packard generated $4.0 billion of cash from operations versus $3.0 billion in the previous quarter. The company also utilized $2.7 billion of cash during the quarter to repurchase approximately 64 million shares of common stock in the open market.

The company ended the quarter with $12.7 billion in cash and cash equivalents versus $9.9 billion in the previous quarter. The company exited the quarter with a long-term debt balance of $14.5 billion.

Guidance

For the third quarter of fiscal 2011, the company expects revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted EPS of approximately 90 cents and non-GAAP diluted EPS of approximately $1.08.

HP expects full year fiscal 2011 revenue in the range of $129.0 billion to $130.0 billion, GAAP diluted EPS of at least $4.27, and non-GAAP diluted EPS of at least $5.00.

Our Take

Hewlett-Packard reigns supreme in the computing world with its strong business model and leadership position in both PC and Server segments. The company is also well positioned to challenge Cisco Systems Inc. (CSCO) in the networking space and gain significant market share. Given its strong market position, HPshould benefit substantially from the revival in the U.S., as well as growing Asian demand.

Despite the company’s market position and compelling product line, we remain cautious about future growth, especially as competition from other big technology players, such as Cisco Systems, Apple (AAPL), Acer, Microsoft Corp (MSFT), Dell Inc. (DELL) heats up. The increasing competition may be expected to impact pricing in the market, moderating profitability to some extent.

HP holds a Zacks #4 Rank, implying a short-term Sell rating.

 
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