HP doesn't miss a beat in fiscal Q4

Industry standard CEOs

All eyes were on IT industry bellwether Hewlett-Packard today as it reported its fourth quarter of fiscal 2010 financial results in the wake of bringing onboard its new chief executive officer, Leo Apotheker, and the winding down of arguments last week in the lawsuit between Oracle and SAP, Apotheker's former employer. At least for the past two quarters, the departure of Mark Hurd to Oracle after the Fishergate scandal hasn't put a dent in HP's business.

In the quarter ended October 31, HP's sales rose by 8.1 per cent, to $33.3bn, and despite cost controls and thanks to restructuring costs relating to the company's acquisition of services giant EDS, HP's net earnings only grew by 5.2 per cent, to $2.54bn. But thanks to share buybacks, earnings per share was up 10.8 per cent to $1.13.

For the fiscal 2010 year, HP had $126bn in sales, up 10 per cent, and net earnings of $8.76bn, up 14.4 per cent. Earnings per share worked out to $3.69, up 17.5 per cent. EPS growing faster than net earnings growing faster than revenues is how HP and most of its IT peers want to do it.

During the three months, the Enterprise Business accounted for $15.2bn in sales, up 7.8 per cent. Within that chunk of the HP business, Enterprise Storage and Servers showed the most growth, with sales of $5.27bn, up 24.9 per cent and showing that the recovery in server spending is still well under way, even if it has cooled a bit. Earnings from operations in the server and storage unit (which will have networking consolidated into during fiscal 2011) came to $730m, up an astounding 51.8 per cent. How did that happen, you ask?

It looks like HP sold some Itanium 9300-based Integrity servers finally, and some richer configurations of ProLiant rack and tower and BladeSystem blade servers, too. Cathie Lesjak, HP's chief financial officer, said in a call with Wall Street analysts that HP's BladeSystem sales were up 51 per cent, and VirtualConnect virtual networking for blades and the BladeSystem Matrix integrated "push-button data center" were also singled out as helping to boost margins. All of this certainly helped.

But it also looks like HP chopped costs bigtime with its converged server lines, too, although it did not say where. In the quarter, sales of ProLiant and BladeSystem machines - what HP calls industry standard servers - rose by 32.3 per cent, to $3.53bn, while sales of Business Critical Systems (Integrity, NonStop, and other vintage machines) was up 10.1 per cent, to $695m. Disk and tape storage sales (outside of the embedded storage in servers) were just a tad over $1bn in the quarter, up 13.7 per cent.

The story was less impressive on the services front, but services is a tough business to show growth in right now, as IBM demonstrated in its third quarter. Now that four quarters of numbers for EDS are in, it is a bit tougher to HP to show services growth, and in fact, it really didn't in fiscal Q4. Across all services segments, revenues were up only four-tenths of a per cent, to $8.96bn. Infrastructure technology outsourcing had $4.1bn in sales (up 1.3 per cent), while technology services hit $2.49bn (up 1.2 per cent).

Application services revenues did about the same, rising 1.4 per cent to $1.6bn, while business process outsourcing declined by 12.9 per cent to $695m. While HP has been chopping at costs in the EDS unit like a woodchuck that could chuck wood, earnings from operations across all of the services units combined only rose by 3.7 per cent to $1.5bn. Obviously, earnings from operations in the services business increased a lot more rapidly than revenues, which stagnated, but it is hard to cut costs because services is such a people-intensive business.

HP's Personal Systems Group is the second-largest revenue generator, and in Q4 hesitant consumers held back sales a bit, according to Lesjak. She said that consumers represented about a quarter of HP's overall revenues and that sales were uneven to consumers across geographies and product lines. There were some issues with HP's PC business in China in particular, but the company did not elaborate as to the nature of the problem except that it would take a couple of quarters to fix the problem.

Personal Systems Group had $10.3bn in revenues, up 4.3 per cent, with earnings from operation of $568m, up 23.5 per cent. Clearly, the desktop and laptop upgrade cycle among businesses, who locked down spending in early 2008 when the global economy went south, is maintaining its recent head of steam. Notebook sales were $5.61bn, off 3 per cent just like notebook unit shipments were in Q4, thanks to softness among consumers, Desktop computer sales at HP rose by 12.6 per cent to $3.92bn, and workstations rocketed up 54.7 per cent. Commercial PC sales across all types rose by 20 per cent in the quarter, but consumer PC sales fell by 10 per cent.

HP's Imaging and Printing Group is the profit engine at the IT giant, and it literally has machines in the basement that print out dollars and euros when it cannot make its numbers. I am kidding, HP does not do that. But we're all addicted to printing things on paper, and as printers have gotten cheaper, supplies have gotten more expensive and HP's profit margins have been the big beneficiary. HP sold $747m in printer hardware to consumers and $1.54bn in printing hardware to companies, but it sold $4.71bn in supplies to all of its printer customers, giving the Imaging and Printing Group just under $7bn in revenues, up 8.4 percent. HP's commercial printer unit shipments rose by 43 per cent, but revenues only rose by 22.2 per cent, which means more companies are buying more and cheaper printers.

Consumer printer revenues fell by 2.1 per cent even as unit shipments rose by 7 per cent. Ink and paper sales rose by 6.3 per cent. IPG had earnings from operations of $4.41bn, up 2.4 per cent. So actually, HP doesn't print the money--it takes yours as you print other stuff. Maybe we need to start printing out our own money so we can get ahead on the deal?

HP's Software unit had $974m in sales, up a smidgen, but earnings from operations of the software biz were up 5.6 per cent to $247m. This is a perfectly healthy business, it is just miniscule. And probably a bit of an embarrassment to a software guy like Apotheker. HP's new CEO said on the call that it was "a bit premature" for him to comment about HP's specific software plans, but he once again said that it was important to "enhance HP's software IP." Some of this could be done organically and some of it could be done through acquisitions, but Apotheker said he would not comment on HP's acquisition strategy on the call.

Apotheker said that he has been traveling around the globe talking to HP employees, customers, and partners and believes he must have set a record for travel during his three weeks on the job. (He did not, of course, allude to missing out on the Oracle-SAP trial.) Apotheker did not tip his hand much to show how he would be running HP. "The great majority are telling me that they want to be doing more business with HP," Apotheker said, referring to the thousands of customers he has met with. "I am hearing that we need to make it easier to buy from HP."

Looking ahead, Lesjak said that HP chopped off the low-end of its revenue guidance range, tightening it up for the first quarter and all of fiscal 2011. HP expects for revenues to grow between 5 and 6 per cent in Q1 of fiscal 2011 ending in January, to $32.8bn to $33bn, with earnings per share ranging from $1.06 to $1.08. For the full year, HP has a pretty tight range as well, with sales expected to be somewhere between $132bn and $133.5bn, which is 4.7 to 5.9 per cent growth, with earnings per share coming in at $4.42 to $4.52. HP is shutting down its Cupertino, California office and consolidating everyone into its Palo Alto facility, which will help earnings to the tune of 4 cents a share. ®

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