Update: HP server group sees profit in Q4

Earnings exceed analysts' expectations

Hewlett-Packard's troubled Enterprise Storage and Servers group bounced back to profitability during its most recent financial quarter, and the company as a whole saw revenue rise 8 percent to $21.4 billion, the Palo Alto, California, company reported Tuesday.

HP's net earnings for its fourth fiscal quarter, which included $136 million in after-tax adjustments, were $1.2 billion, or $0.41 per share. This exceeded analyst expectations of $0.37 per share compiled by Thomson First Call. HP's total revenues were also slightly ahead of Thomson's estimates, which had been $21.1 billion, according to a survey of 18 financial analysts.

Excluding the adjustments, HP's net earnings were $1.1 billion, or $0.37 per share.

The Enterprise Storage and Servers group reported an operating profit of $107 million and a 7 percent increase in revenue. Several key executives in that group were fired last quarter following a botched order processing system migration. The group recorded $4.1 billion in revenue for the quarter.

Problems with the order processing system, which affected sales of HP's ProLiant servers, have been resolved, said Carly Fiorina, HP's chairman and chief executive officer. HP shipped a record number of ProLiant servers during the period, with unit shipments up 18 percent from the fourth quarter of 2003, she said.

HP reversed declines in sales of its NonStop fault-tolerant systems, but sales of the company's Alpha servers, which HP is in the process of phasing out of the market, dropped 27 percent year-over-year. Fourth-quarter revenue from NonStop servers was up 13 percent and up 8 percent for HP-UX systems compared to last year, Fiorina said. NonStop sales were down 25 percent year-over-year during the third quarter.

Sales of the company's Itanium-based Integrity servers now make up 16 percent of HP's high-end "business critical" server revenue, up from 5 percent a year ago, Fiorina said.

Managed services continued to be a fast-growing component of HP's services business. This area grew at 35 percent, year-over-year, fueled by $1.1 billion in services deals signed during the quarter with Nokia Corp., Starwood Hotels & Resorts Worldwide Inc. and WestLB AG, Fiorina said.

"They have nailed down some pretty impressive outsourcing and managed services contracts," said Terry Shannon, the publisher of Shannon Knows High Performance Computing, a newsletter focused on HP. "They're strongest in services and printing and imaging right now," he said.

HP Services reported a profit of $367 million, with revenues up 13 percent from the previous year to $3.7 billion.

The company's Imaging and Printing Group reported a profit of $1.1 billion on revenues of $6.5 billion. HP sold 14 million printers during the quarter, but total revenue was up only 5 percent from the year-ago quarter.

HP's storage division continued to struggle. Networked storage revenue was down 9 percent compared to last year's fourth quarter, despite the introduction of a number of new storage products during the quarter, Fiorina said. "Storage is a business with long sales lead times and it will take more than a quarter or two for us to achieve the results we expect," she said.

HP's Personal Systems Group, which sells desktop systems and notebooks, eked out an operating profit of $78 million on sales of $6.5 billion during the quarter, its strongest performance since 2000, according to HP.

Both the Enterprise and Personal Systems groups have yet to live up to HP's expectations, Fiorina said. "We are not yet to our target levels of profitability in either one. We continue to plan for and expect profit improvement in both," she said.

And while the enterprise market showed signs of "strengthening" during the fourth quarter, according to Fiorina, she did not appear to hold up much hope that the holiday season would bring about a dramatic change of affairs in the Personal Systems Group. "From what we can tell, and obviously it's early going here … our current read of the consumer season is that it's not bad but not spectacular," she said.

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