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HP: We will grow faster than IT

Profits still half of Big Blue

And the server biz?

HP is not particularly optimistic, in terms of growth, about the server business, and the company reckons it has about a $45bn opportunity for servers, which will see a compound annual growth rate of between 2 and 4 percent in HP's 2009 through 2012 years. But gross margins in the server biz range from 25 to 40 per cent, depending on the platform, so this is a better business to be in than PCs by that measure.

HP's storage products are chasing a $30bn opportunity, and this business is growing at 3 to 4 per cent compounded annually over those four years. The good news here is that storage has gross margins on the order of 35 to 50 per cent. And the portion of the networking business that HP has products in comes in at $20bn market, with a CAGR of between 6 and 8 per cent and software-like margins in the range of 55 to 65 percent, according to Hurd's presentation.

The vast software space - which HP is still barely a player in - accounts for a $90bn opportunity. It's growing at 5 to 7 per cent per year. And it rakes in gross margins that range from 75 to 85 percent across the industry. (You can see where HP needs to do a lot more acquisitions, right?) The services biz is vast (hence the EDS deal) with an addressable market on the order of $600bn, but it is only growing at 4 to 6 per cent annually and gross margins are on the order of 20 to 35 per cent.

HP's profit engine, the printing biz, is comprised by a $270bn opportunity, according to Hurd, growing at a skinny 2 to 3 per cent per year, but yielding gross margins on the order of 30 to 40 per cent.

In case you didn't see it, there just isn't a lot of growth in any of these categories. So HP saying that it can beat the IT market's overall growth is not exactly a cause for HP shareholders to jump for joy. Then again, it sure beats wobbly revenues and profits, which is what HP was like before Hurd came on board nearly five years ago. Hurd said that HP was not "going to do dopey stuff" just for the sake of market share but use its product line, which he said was in the best shape he has since them in since taking the helm.

"The job for us is to make everything as standard as we can when it makes sense, and to put innovation and differentiation on top of that standardization," Hurd explained, saying that HP could still streamline and leverage its supply chain and do lots of cross development and integrated sales, such as the BladeSystem Matrix box that HP announced earlier this year to try to steal some thunder from new server rival Cisco Systems.

Looking ahead to fiscal 2010, which begins this November and ends next October for HP, the company's chief financial officer, Cathie Lesjak, said that HP was looking for sales of between $117bn and $118bn in its 2010, which represents 3 to 4 per cent growth over the midpoint of estimates for fiscal 2009. She added that the company was looking for long-term growth of between 4 and 6 per cent beyond then. Which means that HP thinks the overall IT market is going to grow more slowly than this. So don't count that bonus money just yet.

Lesjak said that non-GAAP earnings per share would grow at between 10 and 13 per cent in fiscal 2010 (compared again to the midpoint for fiscal 2009, which is almost done, of $3.82 per share), to between $4.20 and $4.30. Revenue growth will contribute 13 to 16 cents a share to that incremental EPS, with cost cutting and other margin expanding moves accounting for 16 to 22 cents, share repurchases representing 7 to 8 cents, and some other blurry category accounting for 8 cents. HP reckons its takes will be higher, shaving off about 6 cents.

By product line, HP is projecting that its Personal Systems Group will see revenue growth of between 3 and 5 per cent in fiscal 2010, and it will have an operating margin of between 4.5 and 5 per cent of revenue. The Imaging and Printing Group will see sales anywhere from flat to up 2 per cent, but operating margins will be 15 to 17 per cent of revenues. Enterprise Storage and Servers is expected to see sales in fiscal 2010 grow by 2 to 4 per cent, and operating margins ranging from 11 to 12 per cent.

Services has the same growth range, but operating margins are expected to be in the 15 to 17 per cent range. HP's software biz will see a healthier 7 to 9 per cent growth rate in fiscal 2010, says Lesjak, and operating margins in the range of 18 to 20 per cent of revenues. And finally, HP Financial Services will see sales grow by 6 to 8 per cent and have gross margins at a slim 6 to 8 per cent.

What HP really needs to do is convince IBM to buy Lenovo and get back into the PC business. Maybe get back into printers and disk drives. Then the profit pictures of the two companies might realign. Either that or HP needs to buy IBM's mainframe hardware and software business. ®

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