HP Earnings: Barring PC Sales, Revenues Decline

Hewlett-Packard (NYSE:HPQ) posted its fourth quarter earnings for fiscal year 2014 on 25th November. In line with our expectation, HP’s revenues declined moderately by 2% year over year to $28.4 billion. ^[1] While the enterprise divisions, which include enterprise group, HP services, software and HP Finance, failed to deliver growth yet again, its computer hardware group posted year-to-year growth. The primary reason for decline in revenue was the lack of the much anticipated growth in the server and storage division, indicating that server demand across the globe remains tepid, and the challenging economic environment across IT services business. The company delivered $0.70 in GAAP diluted earnings per share, marginally down from the year-ago quarter. Except printing and personal systems group, which comprises the personal system division that witnessed growth, the company reported division wide decline across all its reporting segments. Enterprise services revenues declined by 7% year over year to $5.51 billion, the enterprise group revenues declined by 4% to $7.27 billion, and software revenues declined by 1% to $1.08 billion.

See our full analysis on HP

Outlook for Q1 and 2015

For Q1 FY15, HP estimates non-GAAP diluted net EPS in the range of $0.89 to $0.93, and GAAP diluted net EPS in the range of $0.72 to $0.76. For fiscal 2015, HP estimates non-GAAP diluted net EPS between $3.83 and $4.03 and GAAP diluted net EPS between $3.23 and $3.43. ^[2]

Shipment Sales Spur PC Division

HP’s PC and Workstation division is the fourth largest division, contributing nearly 30% to its revenue and 11% of its estimated value. According to Gartner, worldwide PC shipments experienced marginal decline in the third quarter of 2014. ^[3] However, HP’s personal systems division outperformed the industry as both the number of shipments and revenue grew. The company reported 5% growth in total units shipped during the quarter, buoyed by a 8% increase in notebook shipments. While commercial revenues were up 7%, consumer revenues declined by 8%. As a result, the company reported 4% year-over-year growth in revenues to $8.94 billion against the backdrop of a 0.5% decline in PC units in the third calendar quarter. Operating profit also improved to $355 million or 4% of revenue. The surge in PC sales suggests that HP’s clients are looking to refresh their aging installed base as Microsoft has withdrawn support for Windows XP. We believe that this will augur well for the company in the coming quarters, albeit the release of Windows 10 may postpone the buying decision to later quarters.

HP Service Revenues Continue To Suffer

The services division makes up 24% of HP’s estimated value. HP’s enterprise services division reported a 7% year-over-year decline in revenue to $5.5 billion, primarily due to key account revenue run off and softness in new signings for the quarter. Within this segment, the infrastructure technology outsourcing division reported a 7% year-over-year decline in revenues to $3.44 billion, due to a revenue run-off of lapsed contracts and pricing pressures. Furthermore, its application and business services revenues declined by 6% year over year to $2.06 billion, primarily due to softness in the applications business.

Enterprise Group Stalls As Server Demands Fails To Materialize

The Enterprise Group is HP’s second largest business division and makes up 20% of its value. Notably including HP’s Industry Standard Servers (ISS), the division reported 2% year-over-year decline in revenues to $3.37 billion. Additionally, the company continued to experience decline in its business critical systems division as revenues declined by 29% year over year to $669 million. However, ISS revenues were up 9% sequentially and the high end was mildly positive  across the same metric.The storage division revenues declined 8% to $878 million as revenues for traditional systems declined by 14%. However, storage revenues grew 10% quarter to quarter, while converged storage grew by 9% and mid-tier 3PAR storage unit continued to gain traction. In sum, sequential comparisons suggest momentum is increasing, even as the year-to-year counterparts remain negative.

Pricing Pressure Drags Printing and Ink Cartridge Division

The printer and ink cartridge division is HP’s third largest division and makes up 22% of its value. The printer division reported 5% year-over-year decline in revenues to $5.7 billion in the quarter as supplies revenues declined by 7% to $3.59 billion. The primary reason for decline in supplies revenue was reduction in channel inventory from the consolidation of U.S. retailers, which also suggest some softness in demand in the future. Furthermore, a 1% year-over-year decline in the number of hardware units shipped accentuated the decline in average selling prices and revenues. While the commercial hardware unit sales grew by 5%, consumer hardware unit sales declined by 4% year over year.

Software Division Revenues Flat lines

The software division makes up 7.8% of HP’s estimated value. The company reported 2% growth in license revenues, 3% decline in service revenues and 1% decline in support. The primary reason for growth in license revenue was good recovery in the IT management category, which was buoyed by demand in software as a service (SaaS). As a result, HP’s software division revenues witnessed marginal 1% year over year decline in revenues to $1.08 billion. Furthermore, HP reported double-digit revenue growth in its cloud, security and big data services. We believe that cloud services are potentially the biggest new revenue source for HP in FY2015. ^[4]

We are in the process of updating our model. We presently have a $29.70 price estimate for HP, which is 20% below the current market price.

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1. See HP’s Pre-earnings article [↩]
2. 8-K [↩]
3. Gartner Says Worldwide PC Shipments in the Third Quarter of 2014 Declined 0.5 Percent, October 8 2014, www.gartner.com [↩]
4. Earning transcript call, November 25 2014, www.seekingalpha.com [↩]