HP rings up Hurd's final quarter

Farewell profit leap

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Mark Hurd, the ousted president, chief executive officer, and chairman of IT giant Hewlett-Packard, turned in a decent final quarter.

In the quarter ended July 31 – only a week before Hurd was shown the door for becoming embroiled in a sexual harassment lawsuit with a consultant that was hired to be a greeter at HP events and for doctoring his expense reports – HP reported sales of $30.73bn, up 11.4 per cent compared to the year ago quarter and just shy of sales in the second fiscal quarter ended in April.

Net income rose by 6.1 per cent, to $1.78bn, but fell sequentially from the $2.2bn HP booked in that April quarter. Sales and administrative costs rose a bit in the quarter, eating into profits, as did the $598m in restructuring charges that HP booked in Q3, up from $180m in Q2 and from the $362m booked in the year-ago quarter.

With the exception of its HP Financing group, all of HP's groups - covering services, servers, and storage, PCs, printers, and software - saw year-on-year growth in Q3 and sequential declines from Q2.

HP's Personal Systems Group, which makes and sells desktop, laptop, netbook, and workstation PCs, had sales of $9.92bn in the third quarter of fiscal 2010, up 17.5 per cent. Earnings from operations in the PC group hit $469m, up 21.2 per cent. Total PC shipments rose by 12 per cent in the quarter, and in a conference call with Wall Street analysts, Cathie Lesjak, HP's CFO and interim CEO, said that the PC refresh cycle was under way at both SMB and larger enterprises.

The company said that notebook PC sales rose by 10.3 percent, to just under $5.3bn, and thanks to the corporate refresh of aging PCs that is underway at some companies, even desktop PCs had revenue growth, up 26.9 per cent to $3.93bn. Workstation sales jumped by an impressive 53.5 per cent, to $459m, with the remaining scraps of a few hundred million dollars coming from handheld and other computing devices.

The Imaging and Printing Group is where HP prints money - well, not literally because that would be wrong - and that unit grew revenues by 9 per cent, to $6.17bn. Operating earnings from the printer group came to $1.04bn, up 8.3 per cent, so there is a little profit pressure here. But as you can see, printer ink is what keeps HP afloat, from a profit standpoint. Sales of printing and imaging hardware to consumers came to $648m in fiscal Q3 (up 3.5 per cent), while sales of devices to corporations accounted for $1.39bn (up 28 per cent). Supplies revenues were up 4.6 per cent to $4.13bn. Color LaserJet units were up 31 per cent, while multi-function printer units rose by 47 per cent.

The HP Services group, thanks to its embiggening after eating Electronic Data Systems, is now a sizable portion of HP's revenue stream, and in the third quarter services accounted for $8.61bn in revenues, but only up 1 per cent. However, HP Services brought in $1.37bn in earnings from operations, which means it accounts for more profits than the printer racket (as it has since HP bought EDS and consolidated the operations).

However, the services business is people intensive, and more overhead no doubt gets allocated to services than to printers, so at the net income level, it is hard to believe that the Imaging and Printing Group is not quite a bit more profitable down there on the bottom line.

Operating earnings for HP Services grew by 4.9 per cent, showing that the Mark Hurd Toolset of pliers, chainsaw, and woodchipper were still working to drive out costs and drive up profits in the combined HP-EDS services biz. To the great chagrin of many employees, who no doubt whooped for joy when Hurd was kicked to the street. And if there is any irony at all in the world, to a desk as the new CEO at Dell (the company) so Dell (the man) can go back to being an aloof chairman again.

Infrastructure and technology outsourcing accounted for $3.94bn in sales in Q3, up a smidgen, and technology services actually fell by a point to $2.37bn. HP's application services unit posted sales of $1.5bn, up 4.1 per cent, and business process outsourcing had $727m in revenues, rising a modest 1.1 per cent.

The Enterprise Storage and Servers group raked in $4.44bn in sales in the quarter, up 19.1 per cent, with earnings from operations of $549, rising a cool 44.1 per cent. The Industry Standard Servers division within the ESS group represented the bulk of HP's enterprise hardware sales, with just a hair over $3bn in revenues in the quarter, up 3.1.3 per cent. The x64 server business is almost back on track, and is dragging Windows and Linux along with it. HP said that blade server sales in the ISS group rose by 29 per cent.

The Business Critical Systems division, the part of the ESSN group that peddles Itanium-based rack and blade servers running HP's HP-UX, OpenVMS, and NonStop platforms as well as Linux and Windows (well, not all that much, really), continued to be a loser in the quarter. Sales were down 15.5 per cent to $503m. You can blame some of this on Intel and its late "Tukwila" quad-core Itanium 9300 processors, but HP has to take some of the blame for not having high-end boxes ready for customers to buy months ago, not in the fourth quarter. (Maybe too many people were fired from BCS? Naw, that can't be it...).

HP's StorageWorks division, which peddles disk and tape products, had $904m of sales in the quarter, up 9.7 per cent. Midrange EVA disk array sales fell 3 per cent.

HP is still reporting its 3Com and ProCurve products, now known as HP Networking and expected to be merged into the ESS group at some point, in its Corporate Investments area, and ProCurve revenues were up 42 per cent and overall HP Networking were up 198 per cent when you add in 3Com. Lesjak said that of the top 1,000 HP customers in the world, 300 of then are in proof of concepts with the new HP networking products. Corporate investments had $607m in sales, more than triple the year ago.

HP Software, which is a relatively tiny business compared to its peers, accounted for $863m in revenues (up a measly 1.9 per cent) and had operating earnings of $183m (up 19.6 per cent). Business technology optimization software - the Mercury Interactive and OpsWare products that have been rebranded and cooked into OpenView - accounted for 67 per cent of software revenues, and grew 3 per cent. Other software, which includes operating systems, fell one point.

When you add the services, systems, and software businesses together, you get the half of HP the company calls the Enterprise Business these days, and that had $13.92bn in revenues, up 6.3 per cent.

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