Hewlett-Packard (NYSE:HPQ) posted its first quarter earnings for fiscal year 2014 on February 2oth. The company delivered better than expected results, buoyed by resurgence in PC sales. Not only were revenues ahead of the consensus at $28.15 billion, the company delivered 10% year-over-year growth in non-GAAP diluted earnings per share to $.90, which was 0.4 cents higher than the upper-end of the guidance. However, revenues continued to reflect the challenging economic environment across some of its business verticals. While services revenues declined by 7% year over year to $5.95 billion, the software division revenues declined by 4% to $916 billion. However, personal systems and enterprise group revenues, buoyed by share gains across the hardware segments, grew by 4% and 1%, respectively.
Outlook for Q2 and 2014
For Q2 FY14, HP estimates non-GAAP diluted net EPS in the range of $0.85 to $0.89 and GAAP diluted net EPS in the range of $0.62 to $0.66. For fiscal 2014, HP estimates non-GAAP diluted net EPS between $3.60 and $3.75 and GAAP diluted net EPS between $2.85 and $3.00. Fiscal 2014 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.75 per share, related primarily to the amortization of intangible assets and restructuring charges. 
Commercial Sales Spur PC Division
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 globally 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. While consumer PC sales declined 3% year-over-year, commercial sales grew 8%. Furthermore, the commercial notebooks grew by 4% over the prior year period.
The company reported 6% growth in total units shipped during the quarter, buoyed by a 5% increase in notebook shipments. As a result, the company reported 4% year-over-year growth in revenues to $8.53 billion against the backdrop of a 7% decline in PC units in the fourth calendar quarter.  Additionally, operating profit improved by 0.5% y-o-y to $279 million or 3.3% of revenue.
HP Service Revenues Suffer Due To Tepid Business Environment
The services division makes up 30% of HP’s estimated value. HP’s enterprise services division reported a 7% year-over-year decline in revenue to $5.59 billion and softness in new signings for the quarter. Within this segment, the infrastructure technology outsourcing division reported a 9% year-over-year decline in revenues to $3.5 billion, due to a contractual revenue run-off and pricing pressures. Furthermore, its application and business services revenues declined by 4% year over year to $2 billion, primarily due to softness in the applications business.
Software Division Suffers Due To Low Demand For Consulting Services
The software division makes up 10% of HP’s estimated value. The company reported 12% decline in professional consulting services and 6% decline in license revenues. As a result, its software division revenues declined by 4% year-over-year to $916 million. However, 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 FY2014. 
ISS Buoys Server and Storage Division
The server and storage division is HP’s second largest business division and makes up 20% of its value. HP’s Industry Standard Server (ISS) division reported 6% year-over-year growth in revenues to $3.17 billion. The primary driver for this growth was HP’s Hyper Scale Server group, which reported double-digit growth in shipments. However, the company continued to experience decline in its business critical systems division as revenues declined by 25% year over year to $228 million.
The storage division revenues were flat at $834 million as its converged storage offering reported 42% year-on-year growth, offsetting the decline in traditional storage systems. Its mid-tier 3PAR storage unit continued to gain traction as well. As more companies adopt Cloud storage, we expect 3PAR and converged storage solution will drive revenue growth at its storage division.
Pricing Pressure Drags 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 2% year-over-year to $5.8 billion in the quarter. The primary reason for the decline was a contraction in average selling prices across ink and laser hardware, led by the tough pricing environment. However, a 5% year-over-year growth in the number of units shipped helped offset the decline to some extent. While consumer hardware unit sales grew by 4% year over year, commercial hardware unit sales increased by 6% against the same metric.
We are in the process of updating our model. We presently have a $23.41 price estimate for HP, which is 28% below the current market price.Notes: