HP Turns in a Solid Fiscal 2007 Second Quarter

Published: May 16, 2007

by Timothy Prickett Morgan

With the exception of weaknesses in high-end storage and tape and a few other minor areas, Hewlett-Packard turned in a rock solid--and maybe even a somewhat surprisingly strong--fiscal 2007 second quarter, with sales up 13 percent to $25.5 billion in the quarter ended April 30. Earnings from operations rose 22 percent to $2.2 billion, but because HP had to pay taxes this time around and actually had a tax benefit in the year-ago quarter, the company posted net earnings of $1.78 billion, down 7 percent.

The two engines of HP's fiscal second quarter were its Personal Systems Group, which sells PCs and laptops, and its Imaging and Printing Group, which sells printers, their supplies, and other imaging gear. Still, HP's Enterprise Storage and Servers unit did well, for the most part.

"These are strong results," said Mark Hurd, HP's chairman and chief executive officer in a conference call with the press after Wall Street closed today. "HP recorded its strongest results since 2000," he said, and added that the company was on track to break the $100 billion sales mark--and be the first such vendor to do so--in its fiscal 2007 year.

"Personal Systems had an outstanding quarter," Hurd said, and he actually said it without the usual note of caution he has given when he speaks about HP's business in the past two years. PSG sales exploded by 24 percent to $8.7 billion, and unit shipments of desktop and laptop computers grew by 30 percent. Notebook sales rose by 45 percent to $4.1 billion, reflecting the move to mobile machines among some users, but desktop sales also rose by 9 percent to $3.9 billion. Sales to consumers rose by 41 percent in the second quarter, while sales to commercial customers rose by only 13 percent. Workstation sales came to $402 million in the quarter, up 19 percent, while handheld and other devices amounted to $273 million. PSG had an operating profit of $248 million in the quarter.

Hurd said that the company's PC business is growing at two times the rate of its competitors. When asked about the boom in PC sales, Hurd said that there was some Vista effect involved, as users upgrade to the latest Microsoft Windows platform for PCs. "The situation about market share is a result, not an objective," Hurd explained. "I think innovation and support are key, and we are just focused on running a great business." He also said that the broad reach of HP's global channel is a key asset, and one that competitor Dell cannot bring to bear.

IPG's sales in the second quarter rose by a more modest 6 percent, to $7.2 billion. Supplies sales rose by 10 percent, and printer unit shipments rose by 11 percent, with consumer units up 7 percent and commercial unit up 21 percent. Multifunction printers and color laser prints were key drivers in the quarter, and IPG had an operating profit of $1.2 billion.

HP's Enterprise Storage and Servers group, which has been problematic in past years, is not bringing nearly as much dough to the middle line as IPG, but HP has done a lot of work to get this business generating cash. Sales rose by 8 percent to $4.6 billion, and operating margins rose by 26 percent to $407 million. The Industry Standard Server unit, which peddles rack, tower, and blade servers based on X64 processors, saw sales rise by 17 percent to $2.8 billion, and Blade System blade server sales rose by 58 percent. HP's new c-Class blades, which are denser and more sophisticated than prior blades machines, are getting some traction in the market. Even though Itanium-based Integrity server sales rose by 60 percent in the quarter, sales were not sufficient to counterbalance declines in legacy AlphaServer and HP 9000 sales. (The Integrity machines support HP-UX, Windows, Linux, OpenVMS, and NonStop platforms.) The net effect is that sales in the Business Critical Systems unit dropped by 6 percent to $862 million. Storage sales rose by a meager 1 percent in the second quarter to $939 million, with sales of midrange EVA disk arrays up 10 percent and declining sales of high-end arrays and tape products eating up most of those gains.

HP Services had sales of $4.15 billion, up 7 percent, with revenues of $2.16 billion in technology services, $1.12 billion in outsourcing services, and $795 million in consulting and integration. HP Software had sales of $523 million, which Hurd said was ahead of plan. He added that the Mercury Interactive software and services stack was performing ahead of plan, with double-digit growth. HP Financial Services had sales of $550 million, up 6 percent.

On a geographical basis, HP's sales in the Americas region rose by 11 percent to $10.7 billion. Unlike rivals IBM and Sun Microsystems, HP did not see a shortfall in sales in the United States in its most recently completed quarter. "U.S. enterprises behaved roughly as we expected," Hurd said. He also cautioned Wall Street analysts on their conference call to not read too much into that. Sales in Europe rose by 14 percent to $10.3 billion in the fiscal second quarter, but when counted in local currencies, the growth was only 7 percent. Sales in HP's Asia/Pacific operations increased by 16 percent to $4.5 billion, which works out to 13 percent growth in local currencies in the region.

"HP is performing well," said Hurd. "Revenue is up, cash flow from operations is strong. But don't let me confuse you. HP is still transforming. We still need to reduce costs so we can reinvest in the business." He said that HP would remove more costs from its operations from 2007 through 2009 inclusive than it did in after he took the helm in 2005 and on through 2006.

Looking ahead, Hurd said that the company expected sales of between $23.7 billion and $23.9 billion in its fiscal third quarter, with earnings coming in at 60 cents to 61 cents per share. He also said that for fiscal 2007, the company is expecting sales of between $100.5 billion and $100.9 billion, and earnings in the range of $2.51 to $2.53 per share. The precision in those numbers suggests that HP is pretty sure about its prospects between now and the end of October.

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