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HP rides EDS buy through Meltdown

Q4 revenues up, profits debatable

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Software, Services, and More

On the services front, of course, HP's acquisition of Electronic Data Systems kicked in, doubling its services biz to $8.64bn. EDS accounted for $3.86bn of that total (about two months of results for EDS). HP's homegrown technology services posted sales of $2.45bn, up 9.8 per cent; outsourcing services had sales of $1.47bn, up 15.5 per cent and its best quarter in history; and consulting and integration services had sales of $868m, up 2.4 per cent.

HP Software, which includes OpenView, OpenCall, OpsWare, and various Mercury products all rolled into one group, had $855m in sales, up 12.6 per cent and an operating profit of $195m. A large portion of the sales for the HP software biz ended up on the bottom line - something HP has wanted for years and has spent billions to acquire.

HP's Personal Systems Group did pretty well, despite the skittishness in the consumer economy and the gloomy projections for the PC business in general coming out of the IT market researchers and Intel lately. PSG posted sales of $11.2bn in Q4, up 10.3 per cent. Notebooks were the star of the quarter, with sales up 21.4 per cent, pushed by unit growth of 38 per cent. Desktop sales fell by 1.8 per cent despite unit growth of 3 per cent. Workstations were flat at $473m, and handhelds and other devices made up the remaining (and tiny) portion of sales. PSG posted an operating profit of $616m in Q4, its best quarter in a long while.

As usual, the Image and Printing Group was the profit engine, and even with sales down 7/10ths of a per cent to $7.5bn, operating profits in this HP group came to $1.16bn in the quarter. Printer sales across all categories were down 8 per cent, but supply sales were up 9 per cent, thanks in part (2 per cent of that 9 per cent, in fact) to a price hike on ink and paper earlier this summer. (Supplies made of 64 per cent of the revenue in IPG in the quarter). Lesjak said that HP realized that people were not upgrading their printers as fast as they might, but they still buy consumables, and this means HP gets more profit for less R&D and manufacturing work. The trick is to balance factory capacity to demand.

HP's Financial Services equipment financing unit, which is not part of its HP Services business (go figure), had $691m in sales in the quarter, up 5 per cent, and an operating profit of $51m. HP has $7.4bn in debt relating to financing of the HP Financial Services portfolio, and another $7.1bn in commercial paper debt relating to its acquisition of EDS.

On a geographical basis, HP's revenues in the Americas region in fiscal Q4 were up 17 per cent to $14bn, up 22 per cent in EMEA to $14.1bn, and up 14 per cent in Asia/Pacific to $5.5bn. Sales in the hot markets of Brazil, Russia, India, and China rose in aggregate by 23 per cent compared to Q4 of fiscal 2007.

For the twelve months of fiscal 2008, HP had sales of $118.4bn, up 13.5 per cent, and it brought $8.33bn to the bottom line (up 14.7 per cent), or $3.25 per share (up 21.3 per cent). Revenue growth for the year was only 8 per cent in constant currency, HP said in its financial statements.

Looking ahead, Hurd and Lesjak said what they often say in these calls - that they are not economists. Hurd reminded everyone that HP only sees what it sees. And Lesjak was even less committal. "We don't know how the economy will evolve," she said in the call. But HP took a stab at guessing its revenues and profits for Q1 fiscal 2009 and the full fiscal 2009 year, and Lesjak said HP was trimming back the numbers a bit. Interestingly, Hurd said that the company was more sure about its bottom line projections than its top line ones looking ahead, which might seem backwards, but if he is right, then that is a great business to be in.

Anyway, HP reckons that sales in Q1 2009 will be between $32bn and $32.5bn and that earnings per share will be in the range of 80 cents to 82 cents. For the full year, HP is projecting sales of $127.5bn to $130bn, with earnings per share of $3.38 to $3.53. A lot of that revenue growth will come from EDS. And EDS restructurings will, for a while, eat into profits. Lesjak said that HP had eliminated 2,300 positions at EDS in the fourth quarter and that HP would take a $251m charge relating to these layoffs, costs that would be spread over the next two years. She said that HP would book another $150m charge in fiscal 2009 and yet another $130m charge in fiscal 2010 and beyond to cover EDS restructurings. ®

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