HP Q3 revenue a pleasant surprise

Server and PC groups power sales in the quarter

Hewlett-Packard's third-quarter results received a boost from tax benefits, but the company also exceeded analysts' expectations for revenue on strong server sales growth.

Revenue was $20.8 billion, up 10 percent from last year's third-quarter revenue of $18.9 billion. Analysts surveyed by Thomson First Call had expected HP to record $20.5 billion in revenue.

Net income based on generally accepted accounting principles (GAAP) was $73 million, down 88 percent from last year when HP recorded $586 million in GAAP net income. However, HP brought $14.5 billion in foreign earnings back to the U.S. to take advantage of a recently enacted tax break. That increased HP's net income by $988 million to $1.06 billion, or $0.33 per share.

HP also recorded $112 million in restructuring charges during the quarter to account for layoffs in its printing group. Late in the quarter, HP announced a much larger restructuring program that will put 14,500 employees out of work. The company will record a charge of around $900 million in its fourth quarter to account for costs associated with those layoffs.

On an operating basis, HP's income increased in this year's third quarter compared to last year's. The Palo Alto, Calif. company has the performance of its PC group and its server group to thank for that improvement, said Chief Executive Officer Mark Hurd on a conference call following HP's announcement.

Over the past few years, HP has had trouble delivering consistent profits and growth from its low-margin PC and server businesses. Most of the company's profits have come from its printer group, but that division actually saw profits slip in the third quarter.

The Imaging and Printing Group posted $771 million in operating profits, compared to $836 million in last year's third quarter. HP has been pricing its printers to increase its hardware shipments, and that strategy reduced operating profits, Hurd said. But increases in printer hardware shipments generally lead to increases in sales of printer supplies such as ink and paper, which are much more profitable than sales of the actual printers themselves.

Printer revenue grew only 1 percent compared to last year, but printer shipments were up 8 percent, HP said. Shipments of color laser printers and multifunction printers were up strongly at 31 percent and 67 percent, respectively.

The Personal Systems Group, which develops and sells PCs and handheld devices, improved its revenue by 8 percent over last year to $6.4 billion in the quarter. Unit shipments increased by 14 percent, and the group's operating margin of 2.6 percent, although low by relative standards, was the group's best performance since HP acquired Compaq, Hurd said.

HP saw some of the same pricing pressure that affected the operating results of fellow PC makers Dell Inc. and Gateway Inc., but that environment did not have as much of an effect on HP's results, Hurd said. Even before Hurd came to HP in April, the company had begun to downplay its market share competition with Dell and focus on making its PC business profitable.

Revenue from low-end servers increased 28 percent in the third quarter, leading HP's servers and storage group to $4 billion in revenue, a 20 percent increase compared to last year. This group swung to a $150 million operating profit in the quarter, up from a loss of $211 million last year. Its operating margin was 3.8 percent of revenue.

The server group's performance this year was helped by the comparison to a horrible quarter last year, when a botched rollout of a new order processing system was responsible for lower-than expected revenue and led to the dismissal of three prominent sales executives.

HP expects fourth-quarter revenue to come in between $22.4 billion and $22.8 billion.

Copyright © 2005 IDG Communications, Inc.

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