HP’s Q4 Earnings Beat Street and Shares Rise

Computing giant Hewlett-Packard just reported its fourth-quarter results, and they’re slightly better than expected, with some bad news mixed in.

HP’s profit fell by 13 percent from the same period last year, to $1.01 a share. Sales fell three percent year on year, to $29.1 billion.

Profits were slightly better than what analysts had expected, and sales were broadly stronger than the projection, if still down. The consensus view had called for HP to earn $1 per share on $27.9 billion in sales.

For the quarter ahead and the 2014 fiscal year, HP said it expects to earn between 82 cents and 86 cents a share in the first quarter. It reiterated the guidance for the year that it gave at an analysts meeting last month: It still expects to earn between $3.55 and $3.75 a share in 2014. But CEO Meg Whitman has readily conceded that it’s going to be a tough year, and one that will be “pivotal” to HP’s recovery.

HP shares fell 16 cents, or less than one percent, during the regular session, to $25.16. The shares rose by more than six percent after hours, to $26.75, after the results were announced.

The results were a mix of good news and bad news — HP continued the ongoing effort to turn around its fortunes by managing the declines hitting its established lines of business, like PCs and printing, while at same time seeking to start up new lines, like its Moonshot server business.

Keeping in mind that “slightly down” is the new up, the good news this time around was led by the printing unit, where sales fell by one percent, while unit sales rose by six percent.

Personal computer sales fell by two percent, and commanded a three percent operating margin. Sales on a unit basis rose two percent, led by notebook sales.

Sales in the enterprise group rose two percent, and networking revenue rose three percent. Mainstream server sales were also strong, rising 10 percent.

But there was also bad news. Business-critical server sales, once a lesser-known profit engine of the company, fell 17 percent, continuing a steady decline. Enterprise service revenue, still a troubled unit at HP, fell nine percent.

Update: I just got off the phone with CEO Meg Whitman and CFO Cathie Lesjak. Echoing what she said last month, Whitman says the turnaround effort she’s been working on since taking over HP in late 2011 remains “broadly on track.” But she made no secret of her feeling that this was a strong quarter for HP.

“Turnarounds are nonlinear, and this happens to have been a very strong quarter for us,” Whitman said. Printing grew not only in unit sales, but also in market share, at a moment when other printing vendors are still fighting market declines.

PCs are also came out strong, which, given, that the market is declining at the worst rates ever seen, is, Whitman argued, a victory. “It has struggled for two years, and we turned in pretty good performance there. It was down a bit, but not as bad as we’ve seen recently, and commercial PCs were particularly strong.”

But she’s not willing to call a bottom for the PC business. “I don’t want to try and be a prognosticator, because I’ve been wrong before,” she said. While the market research firm is predicting another global decline in PC sales, to the tune of about four percent, Whitman is happy that HP is, for now, doing better than that.

Enterprise Services was also down, but still within the range of expectations, Whitman said. “We actually feel good about a more predictable business there.”

The one unit that grew overall was the Enterprise Group — the servers, storage and networking unit. It was the first time it has seen revenue growth in eight quarters. “It’s a validation of our products and our go-to-market strategy,” Whitman said.

HP’s net debt position has long been a bit of an albatross around HP’s neck. CFO Lesjak said HP generated $2 billion in free cash flow during the quarter, which was about a billion dollars better than expected.

Lesjak told me that the net debt of HP’s operating company — the debt not connected to its financing unit — is essentially gone. That portion of debt on HP’s balance sheet was reduced by $1.3 billion, and has been replaced by a $100 million cash position that now presumably sits on the other side of the balance sheet. “We’re well ahead of what expected. I expected it would have taken us through the middle of Q2 of 2014, Lesjak said.

Overall, HP ended the 2013 fiscal year with $112.3 billion in sales, down from $120.4 billion in 2012, amounting to a decrease of less than seven percent and marking the third year in a row of annual revenue declines.

But, unlike last year, HP is finishing the year with a GAAP profit of $6.5 billion. That’s a big improvement over last year, when HP took a combined $16 billion in asset write-downs for two acquisitions made under prior CEOs: About $8 billion for EDS and another $8.8 billion for Autonomy. That’s the difference a year can make.