Hewlett-Packard (NYSE:HPQ) posted its fourth quarter earnings on November 26th (fiscal years end with October). In line with our expectation, HP’s revenues declined by 3% year over year to $29.1 billion, albeit at a slower pace.  In fact, revenue was modestly ahead of consensus and up 7% over the prior quarter. The company delivered $1.01 in non-GAAP diluted earnings per share, down 13% from the year-ago quarter. Across its many businesses, moreover, the company posted better-than-expected results, especially in PCs and Enterprise hardware. Investors seem to sense the company’s slow turnaround is gaining momentum, as the stock is up 8% on the news. For the full-year, HP reported 7% year-over-year decline in revenues to $112.3 billion, and $2.62 earnings per share.
Tepid Demand Weighs On HP Service Division
The services division makes up 30% of HP’s estimated value. While discretionary IT spending continued to reel due to the tepid business environment, HP did report a 30% year-over-year improvement in signings as the renewal rate increased during the quarter. This signals a pickup in demand in the future.
HP’s Enterprise Services division reported an 9% year-over-year decline in revenue to $5.76 billion. Within this segment, the Technology Services division reported a 6% decline over the same period. Additionally, the Infrastructure Technology Outsourcing division reported a 9% year-over-year decline in revenues to $3.6 billion, due to a contractual revenue run-off and pricing pressures. Furthermore, its Application and Business Services revenues declined by 10% year over year to $2.2 billion, primarily due to softness in the applications business. However, HP reported double-digit revenue growth in its strategic enterprise services such as cloud, security and big data. We believe that cloud services are potentially the biggest new revenue source for HP in FY2014.  Performance continues to be weak overall, however.
Server & Storage Division Shines
The server and storage division is HP’s third largest business division and makes up 20% of its value. Buoyed by the growth in global server shipments and a large deal, HP’s Industry Standard Server division reported 10% year-over-year growth in revenues to $3.451, significantly outpacing the server market. Furthermore, HP’s Hyper Scale Server group reported double-digit growth in shipments, reflecting strong demand for this new, leading-edge product. However, the company continued to experience decline in its Business Critical Systems division as revenues declined by 17% year over year to $334 million. This once large and strategic business continues to suffer from a paucity of demand for high-end UNIX systems.
The storage division reported a 1% year-over-year growth in revenues to $952 million as its converged storage offering reported 47% year-on-year growth, offsetting the decline in traditional storage systems. Its mid-tier 3PAR storage unit continued to gain traction as well and reported 64% growth in sales. As more companies adopt Cloud storage, we expect 3PAR and converged storage solution will drive revenue growth at its storage division.
Hardware Unit Sales Surge At Printing and Ink Cartridge Division
The Printer and Ink Cartridge division is HP’s third largest division and makes up ~20% of its value. The printer division reported better-than-expected results as its revenues declined by just 1% year over year to $6 billion in the fourth quarter. HP is focusing on the high-end ink market and commercial hardware. While its consumer hardware unit sales grew by 4% year over year, commercial hardware unit sales increased by 9% against the same metric. As a result, total unit shipments grew 6% year over year, and to some extent offset the 4% year-over-year decline in supplies revenues.
Additionally, its business initiatives like the Ink Advantage program continue to take hold with strong customer adoption. These initiatives not only boost the unit sales but also increase the average selling price (ASP) of each hardware unit. This increase in ASP was also reflected in operating profit margins, which improved to 17.7%. We currently forecast printer prices to remain stable at $180 by the end of our forecast period. However, if these ink advantage programs gain traction and the average selling price of printers increase to 2012 level, our stock price estimate could see upside.
PC and Notebook Division Sales Stabilize
HP’s PC and Workstation division is the fourth largest division, contributing nearly 30% to its revenue and 10% of its estimated value. Weak PC demand across the world continued to plague computer manufacturers during the quarter as the shipments declined. However, HP bucked the downtrend and outperformed the market with particular strength in its commercial PC business. The company reported 2% year-over-year drop in revenues to $8.6 billion against the backdrop of 9.5% decline in PC units in the third calendar quarter.
We are in the process of updating our model. We presently have a $22.96price estimate for HP, which is 15% below the current market price.Notes: