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Shares of Hewlett-Packard Company (HPQ - Analyst Report) or H-P went up 2.5% in after-hours trading following better-than-expected results for the first quarter of fiscal 2014, primarily due to improved performance in the Personal Systems segment, a better mix of business and good cost control.

H-P’s first-quarter non-GAAP earnings of 90 cents per share came ahead of the Zacks Consensus Estimate of 85 cents. Not only did the company’s earnings improve 9.8% year over year, but it also exceeded management’s guided range of 82 cents to 86 cents per share.

Revenues

H-P’s revenues of $28.15 billion beat the Zacks Consensus Estimate of $27.15 billion despite a 0.7% decline from the year-ago quarter.

Segmental Revenues

Personal Systems revenues increased 3.6% year over year to $8.53 billion, primarily due to 8.0% revenue growth in the commercial segment, which more than offset a 3.0% decline in revenues from the consumer segment.

Growth in commercial revenues was driven by the robust performance of its notebooks. Total notebook units sold were up 6.0% from the year-ago quarter. While Desktop units declined 3.0%, Notebook units were up 5.0% year over year.

Printing revenues were down 2.2% year over year to $5.82 billion. Despite the revenue declines, total hardware units increased 5.0% year over year due to an increase in laser volume.

The segment’s commercial hardware revenues grew 6.0% from the year-ago quarter buoyed by its transactional laser, management services and graphics business. Consumer hardware revenues increased 4.0% during the period due to traction in its Officejet Pro X. However, these increases were more than offset by a 3.0% decline in Supplies revenue.

Revenues from the Enterprise Group were up 0.7% from the year-ago quarter to $6.99 billion as H-P’s Industry Standard Servers and Networking performed better.

Industry Standard Server revenues increased 6.0%, while Business Critical Systems revenues slumped 25.0% from the year-ago quarter due to declines in the UNIX market.

Moreover, Storage revenues were flat on a year-over-year basis. Though, Technology Services revenues were down 4.0% on a year-over-year basis, Networking revenues increased 4.0% from the year-ago quarter.

Enterprise Services revenues were down 7.3% year over year to $5.59 billion, impacted by revenue run-off during the quarter.

Revenues were impacted by a 4.0% decline in Application and Business Services revenues and a 9.0% decline in IT Outsourcing revenues.

Software revenues also declined 3.7% year over year to $916 million primarily due to a decrease in License revenues owing to a continuous market shift to SaaS and soft IP management business.

Support revenues and License revenues were down 2.0% and 6.0% on a year over year basis, respectively. Professional services revenues were down 12.0% year over year but SaaS revenues were up 6.0%.

Moreover, cloud, Vertica and Autonomy’s IDOL 10 revenues increased double-digits on a year-over-year basis. Also, during the quarter, H-P saw increased traction in the big data platform, HAVEn.

HP Financial Services revenues declined 9.1% year over year to $870.0 million primarily due to volume declines. Financing volume increased 18.0% year over year while net portfolio assets decreased 6.0% from the year-ago quarter.
 
Operating Results

H-P’s gross margin was up 48 basis points (bps) on a year-over-year basis to 22.8% primarily due to lower costs and higher sales from the IP business.

H-P’s operating expenses were down 1.8% from the year-ago quarter to $4.02 billion. As a percentage of revenues, expenses were down 16 bps. This positively impacted operating margin, which expanded 63 bps on a year-over-year basis to 8.5%.

H-P’s non-GAAP net income came in at $1.74 billion or 90 cents, which improved from $1.61 billion or 82 cents reported in the year-ago quarter. Net margin was up 53 bps on a year-over-year basis to 6.2%.

Balance Sheet and Cash Flow

The company ended the quarter with $16.17 billion in cash and cash equivalents versus $12.16 billion in the previous quarter. Accounts receivable in the quarter came in at $13.49 million. The company had a long-term debt balance of $17.97 billion, up from $16.61 billion in the previous quarter.

H-P generated $2.99 billion in cash from operations versus $2.82 billion in the previous quarter. During the quarter, H-P repurchased 20.4 million shares and paid dividends of $278.0 million.

Guidance

H-P expects its non-GAAP earnings for the second quarter of fiscal 2014 to range between 85 cents and 89 cents per share and that for fiscal 2014 to be within $3.60 to $3.75. The Zacks Consensus Estimate for the second quarter and fiscal 2014 stood at 89 cents and $3.66 per share, respectively when the company reported. So the guidance was encouraging.

Moreover, H-P expects continuous improvement in cash flow, restructuring plans and turnaround strategies. Also, H-P expects better product mix, cost cutting opportunities and increased operating margins.

Summary

Although H-P reported better-than-expected top and bottom-line results, the guidance was strong. So estimates are likely to move up slightly. It is encouraging to note that cost cutting initiatives and higher IP sales have positively impacted margins, something that should continue in the quarters ahead.

Additionally, the company’s traction in the cloud, security and big data segments are positives, going forward. The company’s strategic focus on the software business will help it to achieve long-term profitability.

We believe that H-P’s launch of new phablets in India will boost its mobile solutions portfolio and act as a tailwind for the company’s near-term financial performance.  

However, continuing macroeconomic challenges, tepid IT spending and competition from International Business Machines (IBM - Analyst Report) and Oracle (ORCL - Analyst Report) are the headwinds, going forward.

Hewlett-Packard has a Zacks Rank #2 (Buy). A better-ranked stock in the technology sector is Lexmark International Inc. (LXK - Analyst Report), which carries a Zacks Rank #1 (Strong Buy).
 

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