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HP rides EDS buy through Meltdown

Q4 revenues up, profits debatable

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It is beginning to look like Mark Hurd, chairman and chief executive officer of IT giant Hewlett-Packard, has one of the easiest jobs in the market. Maybe second only to Sam Palmisano, IBM's chairman and CEO and Hurd's chief rival in the IT space.

For the fiscal fourth quarter ending October 31, HP reported sales of $33.6bn, up 18.8 per cent. Taking out HP's acquisition of services giant Electronic Data Systems, which closed in August, HP's revenues rose by only 5 per cent, and if you take out currency effects as well, then sales only rose within local currencies across HP by 2 per cent. This is about as good as you can expect in this economic situation. HP's net earnings actually declined in the quarter, to $2.11bn, down 2.4 per cent, but through the magic of software buybacks, earnings per share rose by 3 pennies to 84 cents in Q4.

Hurd said in a call with Wall Street analysts after the market closed today that HP capped off a record year with a solid quarter, and he said he was pleased with HP's positioning within the economic meltdown. "Great companies sell in tough times, and in tough times, people turn to great companies," Hurd explained. He said that the company is leaner and more flexible and that it still had places where it could cut costs - specifically, about $1bn in costs in the coming fiscal year relating to the EDS acquisition.

Cathie Lesjak, HP's chief financial officer, chimed in that HP would be tightening discretionary spending, travel expenses, curtailing hiring of employees, extending plant shutdowns in the holiday season, and doing other things to chop costs. Hurd also said that HP was more confident than you might think because a third of its sales and half of its profits come from recurring revenue streams (services and consumables), and that the company's execution, bolstered by a less complex ERP, CRM, and SCM system installed this year, is better. "This is a big deal for us," said Hurd.

With the EDS acquisition, HP's Technology Solutions Group is now the largest part of the company. Sales in TSG were $14.5bn in Q4, up 42.5 per cent. TSG sells servers, storage, software, and services to enterprises, and it accounted for $705m in operating profits during the quarter.

Sales in the Enterprise Storage and Servers division within TSG were down 1 per cent, to just over $5bn. Within that division, the Industry Standard Servers unit, which peddles ProLiant rack and tower and BladeSystem blade servers based on X64 processors, saw sales drop in by 2.7 per cent to $2.98bn. ISS unit shipments were up 7 per cent in the quarter, but pricing seemed to be aggressive, with revenues down 3 per cent. Blade server unit shipments rocketed up by 30 per cent in the quarter, and sales rose even faster at 43 per cent, but the growth is against a relatively small base and was not enough to make up for declines in tower and rack server sales in the ISS unit.

The Business Critical Systems unit, which sells Itanium-based Integrity machines and legacy Unix and proprietary systems, saw a drop of 9.6 per cent to $935m in the quarter. Integrity server sales were up 6 per cent and comprised 83 per cent of sales in the BCS unit. This means that sales of AlphaServer and HP 9000 legacy systems collapsed in the quarter to around $160m. Disk and tape storage was a relative bright spot in the ESS group, with sales up 13 per cent to $1.15bn. Midrange EVA storage arrays saw 16 per cent sales growth, and high-end XP arrays rose by 9 per cent.

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