HP Closes Out Fiscal 2007 with a Strong Finish

Published: November 27, 2007

by Timothy Prickett Morgan

You can really tell that Hewlett-Packard is as much in the consumer IT market as it is a seller of commercial IT products, and it is also pretty obvious that HP does not have a strong dependency on the financial services industry. These facts are among the reasons why HP was able to close out its fourth quarter, ended October 31, with sales up 15 percent to $28.3 billion. Tight cost controls and lower component costs helped HP bring $2.16 billion to the bottom line, up 21.7 percent from last year's fourth quarter.

"We had a strong, balanced finish to what has been a solid year for Hewlett-Packard," said Mark Hurd, HP's chairman and chief executive officer, in the calls he hosted with the media and with Wall Street analysts just before the Thanksgiving holiday in the United States. Hurd was his normal, even-keeled self, but he didn't say that HP had "a lot of work to do" as many times as he has said in past meetings. And he talked a bit faster than usual, too. This seems to mean that he is pleased with HP's results.

As all HP's employees and channel partners should be. Thanks to growth in hardware sales and 10 acquisitions (mostly in the software space) over the past fiscal year, HP's had $104.3 billion in sales for fiscal 2007, up 13.8 percent and making HP the very first IT vendor to break $100 billion in sales--a feat that IBM has come close to, but never accomplished. HP's net earnings for fiscal 2007 came to $7.3 billion, up 17.2 percent and growing faster than sales as all of HP's units doing a much better job contributing to the bottom line.

The shift among consumers to notebooks and to various kinds of digital gear is benefiting HP in a big way. The company's Personal Systems Group broke through $10 billion in sales in a quarter for the first time, hitting $10.1 billion in sales. PC shipments rose by 31 percent across all types of PCs, with notebook sales up 49 percent and desktop sales up 15 percent; notebook sales are being driven by consumers, who are tossing out their desktops and cutting their LAN cables as notebooks have come down radically in price over the past several years. PSG had an operating profit of $589 million, up 75 percent from the year-ago quarter. HP knows that it cannot grow PC sales at more than twice the market growth rate forever, but making the money in the meantime--and with double-digit growth in all geographical regions--is a good thing. The Imaging and Printing Group, which is the profit engine at HP and the other side of the consumer sales engine at the company, had a more modest 4 percent growth in the fourth quarter to $7.6 billion in sales, with printer supply sales up 6 percent. Operating profits for IPG were flat at $1.1 billion, and were hurt by a $32 million charge HP took in the quarter as it is exiting the digital camera business.

HP also has a large presence in the enterprise space, of course. The Enterprise Storage and Servers group had sales of $5.2 billion, up 10 percent. This was driven as usually by sales of ProLiant rack and tower servers and BladeSystem blade servers in the Industry Standard Servers division, which posted $3.12 billion in sales, up 14 percent. BladeSystem sales rose by 78 percent as HP has gotten traction with its new c-Class blades. The Business Critical Systems division, which peddles HP-UX, OpenVMS, and NonStop platforms (which also support Windows and Linux in the Itanium-based Integrity line), accounted for just over $1 billion in sales, up 5 percent. Integrity server sales rose by 59 percent in the quarter to $718 million, more than offsetting declines in HP 9000, HP 3000, and AlphaServer legacy platform sales. HP's StorageWorks division also posted just over $1 billion in sales in the quarter, up 7 percent; midrange EVA disk array sales rose by 17 percent, but were offset by declines in high-end XP array sales and declines in tape. The ESS group was able to bring $693 million of operating profit to the middle line, up 38 percent compared to the year-ago quarter.

HP's Services group grew more slowly than the company as a whole, with sales of $4.4 billion, up 7 percent. HP's various services divisions--outsourcing, technology services, and consulting and integration--all grew by 7 percent in the quarter. HP Services had an operating profit of $526 million and did not keep pace with revenue growth. HP Software, thanks to many acquisitions, doubled sales to $698 million in the quarter, and operating profit tripled to $177 million. OpenView sales rose by 145 percent including Mercury products and by 24 percent excluding these products, while OpenCall sales dropped by 16 percent. Hurd said that HP is now the sixth largest software company in the world after its acquisition of Opsware. HP Financial Services had sales of $657 million in the fourth quarter, up 21 percent, with an operating profit of $48 million.

Hurd gave extremely tight guidance for the first quarter of fiscal 2008, ending in January, saying that revenues would be between $27.4 billion and $27.5 billion and 75 cents per share in earnings; for the full year, Hurd said HP expected sales of $111.5 billion, with earnings per share ranging between $3.12 and $3.17. HP exited the quarter with $11.3 billion in cash and equivalents, and earlier this month, its board of directors authorized $8 billion in stock repurchases; HP has $2.7 billion remaining in a prior repurchase authorization.

As in the past, Hurd would not be drawn out on how macroeconomic pressures might be affecting HP. "We like our positions in the markets that we are in," he said. "We'll let the economy work its way through and hopefully it will be better than what the downsayers are saying." He also said that HP saw a fairly steady IT spending environment, that pricing was no more aggressive than usual, and that HP saw no change in spending in the financial services sectors--admitting that HP does not have as big a slice of the banking, insurance, and other financial institutions that many of its competitors have.

And, as he took his mike off at the end of the call with Wall Street, Hurd was heard to say one more thing: "That was pretty good."

Indeed.

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