When the technology honcho, Hewlett-Packard (HPQ, Financial), reported its fourth quarter numbers on November 25 after the bell, its shares slipped immediately about 3% in after-market trading, though later subsided to about 1.5%. In fact, HP was able to meet the profit estimates as it is currently under the effect of a turnaround program, but the sales growth across the business segments were pretty weak during the final quarter of the fiscal year. Let’s dive deeper and find out what were the key highlights of the quarter that could aid investors to take a better decision on their existing investment in the company stock.
Sales across business divisions was mixed
Overall sales fell 2.5% year-over-year in the fourth quarter to $28.41 billion. It also fell short of analysts expectations of $28.76 billion.
Looking at each segment, the PC unit showed improvement in fourth-quarter sales that jumped 4% from the year-ago quarter, led by 7% increase in commercial revenue, though there was a decrease in demand in the consumer revenue for the segment. Total PC unit sales saw a rise of 5% with a dip of 2% witnessed in Desktop unit sales and an increase of 8% seen in HP Notebook sales.
However, demand in the Printing and Enterprise (group and services) revenue fell 5%, 4% and 7%, respectively in the quarter. In fact, though CEO Meg Whitman had previously referred to the enterprise group and enterprise services as growth drivers, they have led to stagnant growth in the fourth quarter with the growth rate in these segments being more flat than expected. Such weakness exhibited in the enterprise business was attributed to the impact of the enterprises struggling with the transition of services based in the cloud.
The software and financial services group each posted a decline in revenue of 1% in the quarter on a year-over-year basis. The top-line showed a decline led by most of its business divisions not performing well, except the PC business. Nevertheless, Whitman seemed concerned during the Tuesday earnings call where she echoed the forecast by market researcher IDC which projects PC shipments in mature markets to decline in the coming year. Analysts and investors beware – the personal systems business might come under pressure in 2015.
Profits remain in line with expectations
Net income on a GAAP basis for the fourth quarter fell 5.7% year-over-year to $1.33 billion, or $0.70 a share. However, on a non-GAAP basis, profits declined 2.7% to $2.01 billion, or $1.06 a share, compared with $1.01 a share a year-ago, and in line with analysts expectations.
Whitman said during the earnings call – “I'm excited to say that HP's turnaround continues on track… In FY14, we stabilized our revenue trajectory, strengthened our operations, showed strong financial discipline, and once again made innovation the cornerstone of our company. Our product roadmaps are the best they've been in years and our partners and customers believe in us. There's still a lot left to do, but our efforts to date, combined with the separation we announced in October, sets the stage for accelerated progress in FY15 and beyond.”
Outlook remains strong ahead of the split
For fiscal 2015, the company remains optimistic on the profit estimates which it states could be in the range of $3.83-$4.03 a share, compared with the average projection of $3.95 per share by Bloomberg analysts. This earnings guidance for the full year also exceeds the guidance estimated for the 2014 fiscal year which was in the range of $3.70-$3.74 a share.
However, it’s important to keep investors updated that this forecast does not include the costs of splitting the company into two entities – one for PCs and printers and the other concentrated for corporate and hardware services, a plan that was unveiled by the CEO in October.
The company has promised to give a better update on the full year earnings for FY2015, after its reports the first quarter earnings of the next fiscal year.
On the call, Whitman said that the split would lead to slower decline in the enterprise revenue next year. According to her estimates, enterprise services would become the biggest “swing factor” in the FY2015.
New leadership to follow
After the destined split, the HP enterprise company would be operative under the reigns of Whitman, while the new PC and printing company HP Inc. would have Dion Weisler as CEO. The duo have presided over the introduction of a research-and-development plan for a new type of high-margin computer called the Machine, debuted new servers based on low-power chips from UK based semi-conductor company, ARM Holdings Plc. (ARMH, Financial), have created a cloud-computing service called Helion and have together taken the wraps off new technology to let Hewlett Packard enter the market for 3D-printers.
Therefore, analysts are expecting better days for the company after the split takes shape by next year.
Investor rewards continue
Though there was a downtrend seen in profits and revenue for the tech giant, it was able to generate positive cash flow from operations, though the $2.7 billion generated from operations fell short by 4% from the prior-year period. Irrespective of such shortfall, the company continues to add to the shareholders’ value through the $1.1 billion that was returned to the investors in the form of share repurchases and dividends in the fourth quarter.
Conclusion
The company has kept its outlook positive for the coming year, despite anticipated headwinds from currency fluctuations. Though the final quarter numbers were weaker than expected, the management’s tone remains affirmative as HP has solid strategies in place to grow its top and bottom lines. The Silicon Valley giant is looking at the split in a positive manner and is confident that it will affect the revenue and profits for the two split companies positively.Â
