HP Reports Strong 4Q Revenue, But Profits Drop Slightly

Mark Hurd, HP chairman and CEO, said Monday he was pleased overall with HP's performance. "These results demonstrate an ability to execute in a difficult environment. . . . We believe we held or gained share in every segment," Hurd told a group of industry reporters.

HP reported revenue of $33.6 billion in its fourth fiscal quarter, which ended October 31. That was up 19 percent compared to the $28.3 billion it reported in the same quarter last year.

Sales for the entire year reached $118.4 billion, up 13 percent from fiscal year 2007.

However, HP reported earnings of $2.1 billion for the quarter, or 84 cents per share, down slightly from the $2.2 billion it reported last year. For the entire year, the company earned $8.3 billion, or $3.25 per share, up 15 percent from last year's earnings of $7.3 billion, or $2.68 per share..

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The results included two months of results from EDS, which HP acquired in August.

HP's Personal Systems Group sales grew 10 percent to $11.2 billion, with PC unit sales up 19 percent. The growth was due to a strong uptake in notebook PC revenue, which grew 21 percent over last year while desktop PC revenue fell 2 percent.

HP's Imaging and Printing Group revenue fell 1 percent to $7.5 billion, with the bright spot being supplies revenue, which grew 9 percent over last year. Printer shipments fell 8 percent year over year.

Revenue for the Enterprise Storage and Servers Group was down 1 percent at $5.1 billion. Of that, storage revenue grew 13 percent thanks in large part to a 16 percent increase in midrange EVA sales and 9 percent growth in enterprise-class XP sales. Servers, however, did not fare so well, with industry-standard server sales down 3 percent and Business Critical Systems sales down 10 percent. The bright spot for systems was blade servers, where sales increased 43 percent over last year.

HP services revenue soared 99 percent to $8.6 billion thanks to the increase of $3.9 billion from its acquisition of EDS. However, even without the EDS addition, HP's legacy services revenue grew 10 percent over last year.

HP software sales rose 13 percent to $855 million while revenue from HP Financial Services rose 5 percent to $691 million.

Hurd said that solution providers are facing problems with the liquidity market, and many need help carrying their customers' paper. "We are trying to help our channel partners as much as we can," he said.

The slight decline in HP's Imaging and Printing Group sales came at a time when customers are still printing, but are holding onto their existing printing infrastructure for as long as possible, Hurd said. However, he said that the rise in sales of printing supplies is important to HP.

Actually, selling fewer servers is good for HP, as long as HP maintains or grows its market share, said Cathie Lesjak, HP's executive vice president and CFO.

If customers are holding on to printers longer than in the past, it is good for HP because it means fewer lower-margin hardware sales, Lesjak said. "But as long as people still print on HP printers, that's better for us," she said.

Hurd also said that server virtualization has yet to make an impact on server sales, but that it could have a positive impact over time.

"The server market is $60 billion per year," he said. "But the more that virtualization moves the $33 billion of the server industry that is not industry-standard servers towards industry-standard servers, we love it. We think our technology puts us in a great position."

Despite Intel's slashing of its fourth-quarter revenue expectations earlier this month, Hurd said that he has no insight into Intel's numbers. "We are aware of what (Intel) is seeing, and we are aware of what Microsoft is seeing," he said. "We can only be as competitive as we can be."

Hurd also said he does not expect netbook sales to materially affect HP in the short term because the company is not yet sure whether netbook sales will be incremental over notebook sales or will cannibalize notebook sales. "We need to see how it goes over the next several quarters," he said.

Going forward, HP expects revenue in the first quarter of fiscal year 2009 to be about $32.0 billion to $32.5 billion, with earnings of 80 cents to 82 cents pre share. This compares to revenue of $28.5 billion and earnings of 80 cents per share in the first quarter of fiscal year 2008.

For all of fiscal year 2009, HP expects revenue of between $127.5 billion to $130.0 billion, with earnings in the range of $3.38 to $3.53 per share.

Hurd said he is confident that HP will do well in 2009 for three reasons.

The first is how the company is progressing in terms of its cost structure. He said HP expects to cut about $1 billion in costs with the integration of EDS and with other overhead reductions, and will cut discretionary spending as well.

The second is HP's business mix in which HP gets about half of its revenue from recurring sources including supplies.

The third is continuing to find internal cost savings, such as cutting the number of applications on which HP operates by 65 percent, Hurd said.