HP Chalks Up Another Decent Thirteen Weeks in Fiscal Q3

Published: August 17, 2006

by Timothy Prickett Morgan

The fiscal third quarter ended in July is typically Hewlett-Packard's weakest quarter, and in fiscal 2006, the May through July quarter was also the weakest one on the books. But what a difference two years makes. In fiscal 2006, HP's weakest quarter (the one it just finished) had slightly more revenue and a lot more profit than its best quarter in fiscal 2004. HP, lead by president and chief executive officer, Mark Hurd, has obviously made steady progress getting HP's business units and books in order.

During the third fiscal quarter ended July 31, HP booked total sales of $21.9 billion, an increase of 5 percent over the same quarter a year ago. Net earnings came to just under $1.4 billion, or 48 cents a share, which was a lot better than the $73 million, or 3 cents a share, in the year ago quarter.

HP's six business units--encompassing printers, PCs, servers and storage, software, services, and financing--all booked increased sales as reported during the quarter, and Bob Wayman, HP's chief financial officer, said in a conference call with Wall Street analysts, that all non-financial units reported increases in gross margins during the quarter. HP also reported that sales were up across all of its geographical regions. Sales in the Americas region were up 8 percent to $9.7 billion, with sales in EMEA up 2 percent to $8.4 billion and sales in the Asia/Pacific region up 7 percent to $3.8 billion. However, HP's sales growth is starting to taper off, which would seem to suggest that the company is hitting some limits in terms of how far and how hard HP and its partners can push sales. Hurd has said in the past that HP would get 6 percent revenue growth in fiscal 2006, and so far, he has exceeded that and beat the growth at rivals IBM and Dell, its two largest competitors.

HP's Personal Systems Group is still the biggest breadwinner, with $6.9 revenues in sales, up 8 percent in a very aggressively priced PC and notebook market. Hurd said that unit shipments were up 14 percent across all types of machines. Sales of desktop machines were up 5 percent and accounted for $3.5 billion in sales, with unit shipments up 11 percent. Notebook sales were up 14 percent to just under $2.8 billion, and shipments were up 28 percent. The remaining $621 million in sales for the quarter were for technical workstations, handhelds, thin clients, and other products. The Personal Systems Group brought $275 million in operating profits to the middle line in the quarter.

While HP's Imaging and Printing Group is still a bit behind its PC unit in terms of sales, it is still the profit engine for the company. This group had sales of $6.2 billion in the quarter, up 5 percent, and posted an operating profit of $884 million. HP said that total printer units were up 15 percent, which Hurd said was one of the best quarters for growth that HP has seen in a long time. Shipments of multifunction printers grew by 196 percent and color LaserJet shipments were up 70 percent; these were the two highest growth areas for HP in this group. Across all types of printers sold to consumers, shipments were up 13 percent, and commercial products saw shipments rise by 23 percent. However, supplies still accounted for 60 percent of sales, accounting for $3.7 billion, an increase of 9 percent and largely driving the operating growth in this quarter.

HP's next biggest unit is Enterprise Storage and Servers, and it had sales of $4.1 billion in the fiscal third quarter. HP is still working on getting Integrity machines using Intel's dual-core "Montecito" Itanium chips into market, which Hurd said would happen during the current quarter (the word on the street is in mid-September), and said further that the new c-Class BladeSystems would only be shipping in volume in the current quarter although they were announced in Q3. It is hard to assess what impact delays in Opteron processors, which were expected in early July, also had on sales. HP did not, to its credit, blame its relatively weak 3 percent growth in servers and storage on these factors. Despite this, the server and storage unit had an operating profit of $296 million, double from the year ago quarter.

Even with the Xeon "Woodcrest" and Opteron Rev F processor transitions looming, HP's Industry Standard Server unit was able to increase sales by 6 percent, to $2.5 billion. Hurd said that BladeSystem sales, which are a relatively small component of this segment, were up 37 percent. Itanium-based Integrity sales cooled a bit, which is again partly Intel's fault for the continuing delays with Montecito. Revenue growth for the Integrity line growth was only 76 percent in the quarter (after growing in excess of 90 percent for the prior two quarters) to reach $312 million. HP's Business Critical Server unit, which includes Integrity, NonStop, PA-RISC, and Alpha systems, experienced a revenue decline of 6 percent in the quarter. Integrity sales, once again, are not offsetting declines in the PA-RISC and Alpha lines that have been replaced by the Integrity line.

On the storage front, sales of HP's tape and disk storage products grew by 5 percent to $820 million. HP did not say much about its storage business, except to say that midrange EVA arrays had revenue growth of 17 percent and high-end XP arrays had revenue growth of 19 percent.

HP continues to be picky about its services engagements, and like other big services players, HP Services has learned to walk away from deals that don't make sense to the bottom line. Total services sales were $3.9 billion, up only 1 percent, but operating profits increased for the second quarter in a row as a percentage of sales, hitting $364 million. HP's technology services unit had sales of $2.4 billion, down 1 percent, while managed services rose by 9 percent to $819 million and consulting and integration rose by 3 percent to $702 million. HP Financial Services, which is broken out separately from other services, had sales of $519 million, up 6 percent, and an operating profit of $35 million, down from $58 million a year ago.

OpenView and OpenCall software, which until HP closes its $4.5 billion acquisition of Mercury Interactive before the year ends still account for the vast majority of the sales in the HP Software group, posted a surprisingly good quarter. Total software sales were up 30 percent to $318 million. OpenView sales grew by 21 percent to $216 million, while OpenCall and other software sales increased by 21 percent to $102 million. HP Software delivered a $13 million operating profit in Q3.

Looking ahead, Hurd said exactly what he has been saying for the past few quarters: He is pleased with the quarter, but HP has room for improvement. "By no means am I saying that we rolled a perfect quarter," Hurd said. "We still have a lot of work to do."

On of the things HP needs to finish is the 15,300 layoffs it announced this time last year. HP has laid off nearly 10,000 employees--another 1,900 got the axe in Q3--and has another 5,600 to go. Wayman said HP hopes to have the layoffs done by the end of the fiscal year in October.

Wayman also said that HP expects to have approximately $24.1 billion in sales in that final quarter of 2006, which is consistent with Wall Street's consensus, but added a caveat that like other IT players who operate on a global basis, there are macroeconomic issues and competitive pressures at work that make exact prediction impossible.

RELATED STORIES

HP's Restructurings Start to Pay Off in Profits in Q1

HP Pulls Off a Respectable Second Fiscal Quarter