HP rides EDS buy through Meltdown
Q4 revenues up, profits debatable
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.
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. ®