After about a year of consideration, Hewlett-Packard Company (“Hewlett-Packard”) successfully split itself into two standalone companies — HP Inc. HPQ and Hewlett-Packard Enterprise HPE — effective Nov 1, 2015. Yesterday, both the companies jointly released the fourth-quarter fiscal 2015 results.

Shares went down more than 7% in after-hours trading yesterday, following the lower-than-expected earnings results. Also, a tepid first-quarter and fiscal 2016 earnings guidance dragged the share price.

Non-GAAP fourth-quarter earnings of 93 cents missed the Zacks Consensus Estimate of 96 cents and declined from $1.06 reported in the year-ago quarter.

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The company reported revenues of $25.7 billion, down 9.5% year over year, primarily due to unfavorable foreign currency exchange rates.

Segmental Revenues

Personal Systems revenues decreased 14% year over year to $7.69 billion. Commercial revenues were down 15% from the year-ago quarter and the Consumer segment declined 12%. Also, the company recorded a 12% year-over-year decrease in total unit shipments.

Revenues from notebooks were down 10% year over year, while unit sales decreased 5%. Desktop revenues dropped 21% and units sold witnessed a 17% decline, both on a year-over-year basis.

Printingrevenues were down 14.4% year over year to $4.97 billion, primarily because of 10% decline in supplies revenues and weak performance of the hardware segment. H-P’s total hardware unit sales recorded a 17% year-over-year drop, primarily due to a 23% decline in Commercial hardware units. Consumer unit shipments went down 14% on a year-over-year basis.

Revenues from the Enterprise Group were up 1.5% from the year-ago quarter to $7.36 billion driven primarily by higher revenues from Industry Standard Servers (up 5%), and Networking (up 35%). The upside more than offset the revenue decline of 7%, 8% and 11% in Storage, Business Critical Systems and Technology Services, respectively.

Enterprise Services revenues were down 8.9% from the year-ago period to $5 billion, impacted by main account run-off. Revenues were hurt by 5% decline in Application and Business Services and 11% drop in IT Outsourcing revenues.

Software revenues were down 6.6% year over year to $958 million, primarily due to revenue decline in License (6%), Professional services (3%), Support (9%) and SaaS (2%).

HP Financial Services revenues decreased 11.5% year over year to $802 million, primarily due to 2% decline in net portfolio assets and a 4% drop in financing volume.

Operating Results

H-P’s gross margin was up 12 basis points (bps) on a year-over-year basis to 24.7%, primarily supported by lower cost of sales. The company’s non-GAAP operating expenses were down 5.1% from the year-ago quarter to $4 billion, primarily due to lower selling, general and administrative expenses. As a percentage of revenues, expenses went up 72 bps.

Non-GAAP operating margin decreased 60 bps to 9.1%, primarily due to higher operating expenses as a percentage of revenues.

H-P’s non-GAAP net income came in at $1.687 billion or 93 cents per share compared with $2.014 billion or $1.06 per share reported a year ago.

Balance Sheet and Cash Flow

H-P ended the fourth quarter with $17.43 billion in cash and cash equivalents compared with $17.17 billion in the previous quarter. The company had long-term debt of $21.78 billion as against $14.47 billion last quarter.

H-P generated $2.61 billion in cash from operations. During the quarter, the company repurchased $2.88 billion shares and paid dividends worth $1.25 billion.

Guidance

H-P expects its non-GAAP earnings per share for first-quarter fiscal 2016 between 33 cents and 38 cents, while the Zacks Consensus Estimate is pegged at 43 cents.

According to H-P, fiscal 2016 non-GAAP earnings per share are likely to range within $1.59–$1.69. The Zacks Consensus Estimate stands at $1.72.

Our Take

Hewlett-Packard reported not-so-encouraging fourth-quarter results. Also, on a year-over-year basis, revenues compared unfavorably primarily due to foreign currency headwinds. The company also provided tepid first-quarter and fiscal 2016 earnings guidance.

H-P’s PC business continues to struggle. The persistent decline in PC shipments raises questions regarding the future of the company. As the computing business generates a significant portion of its revenues, the reduction in business volume in this segment is a major cause of concern. H-P is also witnessing secular declines due to an increasing shift toward tablets and smartphones where it is yet to gain a foothold.

Nonetheless, H-P’s cost cutting initiatives are encouraging. The company’s traction in the cloud, security and Big Data segments will drive growth, going forward. We believe that Hewlett-Packard’s strategic focus on the software business will help it to diversify the revenue source, which is still predominantly dependent on PCs.

It is worth mentioning that in Oct 2014, Hewlett-Packard announced that it will split its enterprise-facing hardware and service business and the consumer-facing computer and printer segments, into two publicly trading companies.

Prior to the split, Hewlett-Packard was a leading global provider of computing products, technologies, software and services to individual consumers, SMBs and large enterprises, including those in the public and educational sectors. Products such as PCs and access devices, imaging and printing-related products and services, enterprise IT infrastructure and multi-vendor customer services including support, maintenance, consulting, integration and outsourcing were offered by the company.

However, macroeconomic challenges and tepid IT spending remain the near-term concerns. Competition from International Business Machines IBM and Oracle ORCL further add to the woes.

Hewlett-Packard has a Zacks Rank #5 (Strong Sell). 

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