Original URL: http://www.theregister.co.uk/2010/05/18/hp_q2_f2010_numbers/

HP profits up 28% on freshened servers

x64 leads the way

By Timothy Prickett Morgan

Posted in Financial News, 18th May 2010 23:19 GMT

The IT and investor communities were both a little jumpy this week, worried that IT bellwether Hewlett-Packard wasn't pulling in enough dough. But this was just borrowing trouble. Overall revenues at the HP were up 12.7 per cent to $30.8bn in the second quarter ended in April, and with HP keeping tight reins on costs, net earnings grew by 27.8 per cent, to $2.2bn.

Admittedly, HP numbers compare so well with a year ago, because a year ago, the economy in full melt. Plus, it has benefited from the acquisition of services giant EDS and networking player 3Com. But there is real growth in there, and given that HP spans all the major IT markets (excepting its relatively weak software business), the IT community will no doubt take HP's financials as yet another indication that the global economy is stabilizing.

Server sales tend to be a leading indicator as well as a lagging indicator on the economy - servers are one of the first things companies cut spending on when times get tough and one of the last big items they start spending on when things get better - and in Q2, the economy must have already mended some because HP said its Industry Standard Server division, which peddles x64-based ProLiant servers and BladeSystem blade servers, had a 53.6 per cent explosion in sales, to just over $3bn in the quarter.

That more than makes up for the hole created by the economic meltdown. In last year's fiscal Q2, sales had dropped 29.5 per cent to just under $2bn from $2.82bn in 2008's second quarter.

Cathy Lesjak, HP's chief financial officer, said that HP's VirtualConnect virtualized networking for its BladeSystem blades more than doubled its sales, and blade server revenues (across both x64 and Itanium blades) rose by 45 per cent in the quarter.

Everyone has been wondering if there is pent-up demand for x64 servers. Based on IBM's x64 server sales - up 36 per cent in its first quarter ended in March - and these numbers from HP, it sure looks like an upgrade cycle is under way.

Not all of HP's server lines are seeing the bump, of course. Thanks to Intel's delays in getting the quad-core "Tukwila" Itanium 9300 processors to market, HP's Itanium-based Integrity line is more or less stalled, with only customers who are desperate for processing capacity on their HP-UX, OpenVMS, or NonStop platforms buying today doing so - and no doubt at heavily discounted prices if they can keep their desperation secret.

HP's Business Critical Systems group saw a 17.2 per cent decline in Q2, to $538m. Two years ago, this Integrity business was being criticized for only bringing in $919m in revenues. That looks pretty juicy about right now.

To a lesser degree, HP's storage biz is on the mend, with sales up 15.9 per cent to $948m in Q2, but still lower than the $1.04bn in sales the company had in the quarter two years ago, before the Great Recession took hold thanks to real estate and banking meltdowns. HP said that its midrange EVA disk arrays only saw a 3 per cent growth rate.

Despite all this, Enterprise Storage and Systems group contributed something closer to its fair share to the HP revenue and profit pies, with $4.54bn in sales (up 31.4 percent) and the group contributing $571m in operating profits, up by a factor of 2.3 compared to the year-ago quarter.

The easy compares for HP's services business are over now that it has owned EDS for more than a year, and sales were only up 2.5 per cent to $8.71bn. Within HP Services, infrastructure technology outsourcing rose by 6.3 per cent, to just under $4bn, while technology services revenues were flat at $2.42bn, application services were down 1.9 per cent to $1.51bn, and business process outsourcing services were flat at $716m.

Operating profits were $1.4bn for the combined services units, up 17 per cent from the year-ago quarter. So, true to his word, Mark Hurd, HP's president, chief operating officer, and chairman has worked to extract costs from the EDS services biz. And, looking ahead, Hurd expects the services unit will improve.

"We expect to see a very good year for signings," Hurd said in a conference call with Wall Street analysts, adding that he expected the aggregate HP services biz to grow at or above the services market overall and for the company's backlog to grow at a similar pace.

Software down a smidge

HP Software had $871m in sales, down a point, with business technology optimization products (mostly OpenView, Mercury, and Opsware products) up 2.8 per cent, to $584m, but other software sales falling 8 per cent, to $287m. Operating profit for HP Software came to $162m, up a few points from a year ago.

When you add it all up, HP's Enterprise Business posted $14.1bn in revenues in fiscal Q2. HP's ProCurve networking business is still in the Corporate Investment segment of the company, and sales rose by 31 per cent. Including $50m in revenues from 3Com (two weeks of the quarter), networking revenues rose by 58 per cent. Lesjak said that for the remainder of the year, ProCurve and 3Com products would be in this separate category, but beginning in fiscal 2011, all switching products would be dumped in with servers and storage to create the Enterprise Server, Storage, and Networking group.

That leaves PCs and printers for most of the remainder of the HP business.

HP's Personal Systems Group raked in $9.96bn in revenues in the quarter, up 21.3 per cent. Notebook sales were $5.51bn (up 17.1 per cent), desktop sales were $3.79bn (up 27.2 per cent), and workstation sales were $423m (up 47.4 percent). Hurd said that financial services companies bought a lot of high-end workstations, and that HP has said all along that when the PC recovery comes, it will start with consumers, then move to SMBs, and then reach corporates.

In Q2, consumer PC sales rose by 25 per cent, while corporate PC sales was up only 19 per cent - helped mightily by those workstations. Operating profits in PSG came to $465m, up 23 per cent from the year ago quarter. It is difficult to cut costs in the PC racket, particularly when there are supply constraints for PC components.

As has been the case for the past several decades, the Image and Printing Group is the profit engine at HP, with sales of $6.4bn, up 8.1 per cent compared to Q2 of fiscal 2009. HP can't build enough laser printers to meet demand, as was the case in the first quarter, Hurd admitted, and the company is hoping to get the backlog built and sold this quarter.

Printer unit shipments rose by 9 per cent in the quarter, with consumer printer shipments up 15 per cent but corporate printer shipments dropping 8 per cent. IPG sales to consumers came to $717m, up 15.6 per cent, tracking shipments, and revenues to companies buying printers, scanners, and other imaging products hit $1.35bn, rising 13 per cent despite unit shipment declines. HP doesn't need to print money. It just makes the ink that is as good as money, and supplies revenues for printers (including ink and paper) came to $4.33bn, up 5.6 per cent.

HP Financial Services, which provides financing for all of HP's products, is tracked separately, and it booked $755m in revenues (up 17.8 per cent), with $69m in operating margins (up 49 per cent).

Looking ahead to the rest of fiscal 2010, HP once again raised its revenue guidance, now saying it will see an 8 to 9 per cent bump in sales for the full year, but the $1.2bn acquisition of Palm would drop earnings per share, with non-GAAP EPS growing only 16 to 17 per cent to between $4.45 to $4.50 and after acquisition and other costs are worked in, EPS would be $3.76 to $3.81. In the third quarter, HP expects sales to be in the range of $29.7bn to $30bn, with EPS of between 87 and 89 cents. ®