Hewlett-Packard Earnings: The Good...And The Bad, According To Wells Fargo

In a report published Friday, Wells Fargo analysts reiterated their Outperform rating on

. The company reported its results for FQ2 largely in-line with expectations. "With the spin on track by the end of the FY, management provided a dissynergy forecast of $400-$450MM, which we believe is roughly in line on a percentage basis for other companies that have split (likely below some expectations) with more than half expected to be offset by cost savings next year," the analysts said. The analysts expressed optimism regarding the company's performance in H2, driven by near term server strength. The analyst also believe that Hewlett-Packard's F3Q guidance is "seemingly reasonable," which is likely to shift focus more towards the imminent split. "We believe the split should realize greater value and provide more nimble structures for decision making. We believe both entities will have room to lever up to return cash to shareholders or drive growth/cash flow through M&A," the Wells Fargo report stated. For F2Q, the company reported a better than anticipated cash conversion cycle, as well as strong growth in industry standard servers, driven by share gains and market strength. Although PC revenues were higher than the estimates, profitability was offset by price adjustments and Fx headwinds. The 3Par storage segment also posted robust growth. The company is making good progress towards completing the separation into two entities by the end of the fiscal year. On the other hand, Hewlett-Packard is expected to take on additional restructuring charges during FY16, which is likely to adversely impact FCF. In addition, the company reported a meaningful decline in its enterprise services revenues, driven by general weak and account runoffs. This trend is also visible in the full year guidance. Free cash flow for F2Q was below the estimates, as were storage sales. "HP faces several risks including company-specific execution issues, increased competition, currency, macro economy, among others," the analysts added.