UPDATED 17:51 EDT / AUGUST 24 2016

NEWS

HP earnings beat forecasts, but weak Q4 outlook drops shares

Revenue growth may not be the mantra at HP Inc. these days, but profits are never out of vogue — and that’s where the maker of personal computers and printers has hit a speed bump.

Shares in the mostly consumer-oriented half of the former Hewlett-Packard Co. fell more than 5 percent in after-hours trading today, extending a 1 percent loss before the results, after the company issued a forecast for its fiscal fourth quarter that fell short of Wall Street estimates. HP said it expected to report a fourth-quarter profit before certain costs of 34 to 37 cents a share, short of analysts’ expectations of 41 cents.

The forecast negated what otherwise was a relatively positive third-quarter earnings report. HP reported a net profit of $783 million, or 46 cents a share, on sales of $11.9 billion, down 4 percent from a year ago, or 1 percent in constant currency. After excluding discontinued operations, restructuring charges and other costs, HP earned a profit of 48 cents a share. It was expected to post adjusted earnings of 44 cents a share on sales of $11.5 billion.

PC revenues were flat, an improvements over the last few quarters. But they were dragged down by increasing sales of lower-cost Chromebooks.

Printing revenues, however, plunged 14 percent from a year ago. That decline was led by ink and other supplies, down 18 percent. HP took a $225 million hit from reducing printer supplies inventory in its distribution channel, a move announced in June. Executives said they expect to make a similar reduction in the current quarter. That, Morgan Stanley said in a note to clients, should put HP in a sustainable inventory position by year-end.

Commercial printers were relatively stronger, down 2 percent compared with a decline of 14 percent on the consumer side.

The company has been struggling with declining sales of PCs and printers as the era of mobile phones and cloud computing keeps taking a toll. But because it has continued to generate cash and issued relatively large dividends, its shares had risen more than 20 percent so far this year thanks to buying by investors attracted to dividends.

The just-ended quarter was the “most promising quarter since they spun out of Hewlett-Packard a year ago,” said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy. What’s most promising, he added, is new products with the potential to recharge growth.

For one, he said PCs focused on gaming as well as high-performance notebooks have the potential to improve average selling prices. On the printing side, he said its 3D commercial printers also are finding success at test customers such as Rolls-Royce and Jabil Circuit Inc. “HP is currently in the driver’s seat for industrial-grade 3D printing,” he said.

Indeed, HP Chief Executive Dion Weisler (pictured above) emphasized HP’s focus on attempting to create differentiated products in what otherwise are commodity markets. “We have an incredibly strong portfolio of products,” he said on the earnings conference call.

Still, the biggest impact on HP as a business will be cost-cutting to contend with the declining markets. Weisler said the company is on track to save $1 billion from restructuring and productivity improvements this year. Some 3,000 employees are expected to be cut from the company this year.

HP may find it tough to keep investors interested, Barclays analyst Mark Moskowitz said in a note to clients. That’s partly because printing supplies revenues will be continue to be pressured by the glut that HP has been working to reduce. “We expect shares of HP Inc. to be under pressure in the near term,” he wrote.

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