Volume 3, Number 43 -- November 16, 2006

HP's Financials Weather the Ethics Storm in Fiscal Q4

Published: November 16, 2006

by Timothy Prickett Morgan

Hewlett-Packard reported its financial results for its fiscal fourth quarter ended October 31 after the markets closed today, and the embarrassing legal and ethical woes the company has endured thanks to its pretexting scandal seems to have had little effect on its sales and profits. In the fourth quarter, HP had total sales of $24.6 billion, up 7 percent, and net income rose by 308 percent to $1.7 billion. "This is the most balanced operating performance we have had in many years," said HP's chairman and chief executive officer, Mark Hurd.

No kidding. HP's biggest business in the quarter, in terms of revenues, was its Personal Systems Group, which grew sales in the quarter by 10 percent to $7.8 billion. This unit, which was bleeding red ink for the full year in 2002 and which has not had stellar profits in a number of quarters, brought $336 million in operating profit to HP in the final quarter of fiscal 2006. PC unit shipments rose by 16 percent in the quarter, with desktop sales flat on unit growth of 6 percent and notebook revenue up 24 percent on units up 42 percent. Desktops made up 47 percent of sales, compared to 44 percent for notebooks, in the quarter.

HP's profit engine, its Imaging and Printing Group, which sells printers, scanners, cameras, and other related gear, booked $7.3 billion in sales, up 7 percent compared to the fourth quarter of fiscal 2005. Supplies accounted for 56 percent of sales, and were largely responsible for the $1.1 billion in operating profit that IPG reported in the quarter. HP said that printer hardware sales rose by 17 percent in the quarter, with color LaserJets rising by 40 percent and multifunction printers rising by 160 percent. Sales of printing and imaging hardware to consumers accounted for 18 percent of this group's sales, while sales to commercial customers accounted for 26 percent.

For the past several years, the Enterprise Storage and Servers group has had troubled boosting sales and getting profits, but not in this quarter. But it is important to remember that the ESS group is a lot smaller than the printer and PC parts of HP, even if it is strategically vital to HP in the long run. ESS reported sales of $4.7 billion, up 4 percent, in the fourth quarter and an operating profit of $502 million--the highest level that ESS has reported in a quarter in a long, long time. (Possibly since the dot-com bubble burst.) The Industry Standard Servers division accounted for 59 percent of sales in the ESS group, or just under $2.8 billion, up 9 percent. Blade server sales, which still represent a small portion of ISS sales, were up 38 percent. Sales in the Business Critical Systems unit, which sells Integrity, AlphaServer, and HP 9000 machines, saw a revenue decline by 4 percent, to $987 million. Within the BCS division, Integrity sales were up 77 percent, to about $444 million, and accounted for 45 percent of total sales. Obviously, sales of other legacy midrange and enterprise servers continue to fall, but sales of Integrity boxes have not grown fast enough to fill in the gap.

The StorageWorks Division within BCS had an increase in sales of 1 percent, to $940 million, with midrange EVA storage arrays growing 11 percent and high-end XP arrays declining 3 percent. Tape sales also declined, according to HP. Hurd said that he was disappointed in the revenue growth in certain parts of the storage market, not because HP did comparatively badly, but because he believes that HP can do better.

In terms of revenues, HP Services grew sales and operating profits in the fourth quarter, too. Sales were up 5 percent to $4.1 billion, and the unit had an operating profit of $505 million. Technology Services accounted for 60 percent of the total, or about $2.5 billion, and sales in this area were flat. The Managed Services unit of HPS accounted for $861 million in sales, up 16 percent, and the Consulting and Integration unit booked $779 million in sales, up 7 percent.

The HP Software group, which just completed the $4.5 billion acquisition of Mercury Interactive on November 6, did not see any benefits from that acquisition. Sales were $349 million, up 14 percent and this revenue, which was also bleeding red ink since the dot-com bust, had an operating profit of $60 million. OpenView sales grew by 28 percent to $251 million, while OpenCall and other software product sales declined 11 percent to $98 million. Bob Wayman, HP's chief financial officer, warned that operating margins would be impacted by integration costs and write-downs of deferred revenue associated with the Mercury deal.

Finally, HP Financial Services had sales of $545 million, up 6 percent, and posted an operating profit of $35 million. HPFS had a portfolio of assets with a net value of $7.2 billion, up 4 percent.

Wayman said that HP laid off 4,200 employees in the fourth fiscal quarter, bringing the total number of layoffs associated with its July 2005 restructuring to 14,200 employees. In the first quarter of fiscal 2007, HP plans to have another 1,000 or so layoffs to complete the restructuring.

Looking ahead, HP expects sales to be between $24.1 billion and $24.3 billion in the first quarter of fiscal 2007, with earnings of 55 cents to 57 cents per share. For the full fiscal 2007 year, Wayman said that HP expected total sales of around $97 billion, with earnings of between $2.28 and $2.33 per share. In fiscal 2006, HP had sales of $91.7 billion, up 6 percent, and earnings of $2.18 per share.

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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik,
Shannon O'Donnell, Timothy Prickett Morgan
Publisher and Advertising Director: Jenny Thomas
Advertising Sales Representative: Kim Reed
Contact the Editors: To contact anyone on the IT Jungle Team
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