HP Needs To Show Significant Improvement

| About: HP Inc. (HPQ)
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Recently HP (NYSE:HPQ) reported results for its fourth quarter of fiscal year 2013. The following are the results, my analysis of the results and the future of the company.

Results summary (Year on Year):

For the quarter, the company's revenues fell by 3% from $30 billion to $29.1 billion. The net profit stood at $1.4 billion against the loss of $6.8 billion. On per share basis, earnings per share stood at $0.74 against the loss of $3.49. The operating profit stood at $1.9 billion against the loss of $6.5 billion. However, excluding the effect of onetime items* of about $8.85 billion (during the same period last year), the operating profit was down by about 18.5%.

*impairment of goodwill and intangible assets.

Segment performance (Year on Year):

The company reported its revenues under five main segments. During the quarter, four of the five segments showed declines in revenues while only one showed some positive trend. Enterprise Group was the only segment, which showed some revenue growth. Printing and Personal Systems Group, Enterprise Services, Software and HP Financial Services all showed negative revenue growth.

Printing and Personal Systems Group:

The segment consists of two businesses - Personal Systems and Printing.

It was the largest segment for the company during the quarter and generated about 49% of the company's revenues. The segment's revenues fell by 1.24% from $14.8 billion to $14.6 billion. The operating profits declined by 3.3% from $1.4 billion to $1.3 billion as the operating margins declined by 20 bps to reach 9.10%.

Personal Systems:

Revenues from Personal Systems business declined by 1.7% from $8.7 billion to $8.6 billion. The operating profit declined by 16.2% from $309 million to $259 million as the operating margins declined by 52 bps to touch 3.02%. Total unit shipments for the quarter improved by 2% due to a rise in notebook shipments. Desktop shipments declined by 5%.


Revenues from the Printing business declined by 0.59% from $6.1 billion to $6 billion. The operating profit improved by 0.37% to touch $1.07 billion from $1.06 billion as the operating margins improved by 17 bps to reach 17.72%. Hardware shipments grew by 6%. The supplies revenues, which made up 63.9% of the printing revenues, declined by 4%.


Personal Systems:

Decline in global PC shipments is a well known fact. The company is among the world's top PC vendors, and it competes with Dell, Lenovo, Apple (NASDAQ:AAPL), etc. The negative growth in the PC market has been affecting the company adversely. However, during the quarter the company showed a decent growth in shipments, but the revenues fell due to the lower average selling price ("ASP"), which reflects the higher number of notebook shipments. Going forward the global PC market is expected to decline further. The revenues from the PC market are expected to decline in the future and will not surprise anyone until the margins stay in positive territory. The key worry for the company is the margin decline, which already is on the lower side. If the declining revenues lead the segment to negative margins then it will be a big negative for the company in the future.


The growth in hardware unit shipments is good for the company. The decline in supply related revenues may well be a temporary thing and is expected to get back on track soon. The company's offerings like Ink Advantage program, Instant Ink, etc. met the expected success and helped the company to drive Q4 SMB hardware sales. The company is focusing more and more on enhancing lifetime return of its hardware units.

As mentioned by the company:

"we will continue to invest in unit placements with a lifetime return on the unit makes economic sense and we expect to drive continued momentum in key strategies across ink, laser and graphics."

This approach will make sure that the company in the future will be able to capture all the growth opportunities in the industry, as also will be able to generate a much more steady revenue stream from the supply business.

Enterprise Group segment:

The segment's revenues grew by 1.81% from $7.5 billion to $7.6 billion. The operating profits declined by 10.3% from $1.2 billion to $1.1 billion as the operating margins declined by 197 bps to touch 14.51%. Server, storage and networking businesses led the growth for the segment with 10%, 1% and 3% growth respectively, which reflects the healthy growth of data center industry. Technology Services and Business Critical Systems showed negative growth of 6% and 17%, respectively.


Enterprise group segment primarily fulfills the needs of data-center and high performance needs of enterprises, and it competes with the competitors like Cisco (NASDAQ:CSCO), Juniper (NYSE:JNPR), etc., which are much more focused players.

The growth in the revenues were fueled by the growth in the data center related segments. The decline in the margins reflects the competitive pricing environment. In the future, pricing pressure is expected to continue as the company intends to increase its marketing efforts to improve its revenue growth.

As mentioned by the company:

"we need to do more work to fix our go-to-market strategy in enterprise group, particularly in channel engagement and pricing."

Enterprise Services

The segment's revenues fell by over 9% from $6.4 billion to $5.8 billion. The operating profit declined by over 39% from $423 to $255 million, as the operating margins declined by 223 bps to touch 4.43%. Services related to Cloud, Big Data, application and modernization and security grew double-digits.


The segment has its presence in some of the high-growth businesses like cloud, big data and security. Still, the segment showed a negative performance with all-round de-growth from revenues to margins due to rising competition from companies like Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), etc. If the trend continues to be like this then in the future it will be a big negative for the company.


The segment's revenues fell by over 9% from $1.2 billion to $1.1 billion. The operating profits improved by over 3% from $318 million to $328 million, as the operating margins improved by 367 bps to reach 30.83%. License revenue in the fourth quarter was down 24%, while SaaS revenues showed decent growth of 15%.


The growth in the margins were driven by cost management and also due to the company's strategy to exit from low margin professional service contracts. This trend is likely to continue in the future. The growth in the SaaS is an encouraging sign for the future as it's a predictable and recurring revenue stream. The company's big data analytics solution "HAVEn" received excellent feedback, which is good for the company's future.

HP Financial Services

The segment's revenues fell by over 5.5% from $966 to $912 million. The operating profits declined by about 2% from $104 million to $102 million, as the operating margins declined by 42 bps to touch 11.18%. Financing volume was down 3% with net portfolio assets up $12.2 billion.

FY 2014 Outlook:

The below is the company's guidance for the Q1 FY 2014 and FY 2014.


The company showed a dismal performance during the quarter. It showed an all-round decline during the quarter (from revenues to margins). Decline in Personal Systems is expected but decline in the other segments showed that the company's struggle is spreading well beyond PC market de-growth. The reduction in the margins in Enterprise Group and Enterprise Services segments is a major worry, particularly in Enterprise Services segment where margins had reached low to mid single digits and are expected to come down further.

The result also signifies that the decent growth in the business like Cloud, Big Data, etc. is not good enough for the company to show revenue growth as the growth is coming from a small base. Moreover, as the base for these businesses grows the growth in these segments is expected to come down in the future.

Though there are some positives like margin expansion in high margin printing and software segments. Guidance for FY 2014 is reasonable but overall results contain more negatives than positives and do not provide any sort of long-term visibility. All in all, the company needs to show significant improvements if it wants to return to the growth path.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.