HP Profits Increase 26 Percent in First Quarter

By Scott Ferguson  |  Posted 02-21-2007

Hewlett-Packard, which has overtaken Dell as the world's largest producer of PCs, soared to profitability on Feb. 20, with earnings of 55 cents a share and revenue of $25.1 billion.

Excluding one-time items and other charges, the Palo Alto, Calif., IT giant posted first-quarter earnings of 65 cents a share or $1.8 billion, which beat Wall Street estimates. Analyst polled by Thomson Financial had called for earnings of 62 cents a share.

Overall, HP's first-quarter financial results showed a 26 percent increase from the same time last year. In the first quarter, which ended Jan. 31, the company had profits of $1.55 billion or 55 cents per share, compared to 42 cents or $1.23 billion a year ago. Revenue swelled to $25.1 billion, an increase of 11 percent or $2.4 billion from a year ago. Analysts had called for revenue of $24.3 billion.

"I am pleased with the first quarter and the revenue we had," CEO Mark Hurd told analysts in a conference call following the announcement of the quarterly results.

Carl Claunch, an analyst with Gartner, said HP's roadmap during the past year was to focus in a reasonable strategy and the company then made sure to execute that strategy. The results were not only better profits and margins, but also revenue.

"They really did have a solid quarter of impressive growth," Claunch said.

The company's surge was led by its Personal Systems Group, which saw its revenue climb to $8.7 billion, a 17 percent increase compared to the same time last year. HP's PC shipments increased by 19 percent. Specifically, notebook revenue grew 40 percent, while its desktop revenue fell by 1 percent.

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Asked about Microsoft's Windows Vista operating system, Hurd said its impact in the past quarter was minimal and that it was too soon to tell how the new OS will drive sales in the second quarter.

"We're not forecasting any Vista moments so to speak," Hurd said.

The reason for the company growth in PCs, especially notebooks, was its ability to shift the emphasis to consumers at a time when purchases by enterprise customers had slowed, Claunch said. HP's emphasis on consumers and services helped boost its holiday sales, which helped the bottom line, he added.

HP was also helped by its Imaging and Printing Group, which saw its revenue grow 7 percent to $7 billion.

For the second quarter, HP is calling for earning of 57 to 58 cents a share. Excluding one-time items, the company could earn 63 to 64 cents a share. Wall Street estimates are calling for profits of 63 cents a share. For the entire year, the company estimated it would earn revenue of $98 billion to $99 billion.

Unlike its main rival Dell, which has been under scrutiny from the U.S. Securities and Exchange Commission and watched as Michael Dell took back control of the company from CEO Kevin Rollins, HP has managed to thrive in the past six months despite its own problems.

In September, the first details of the company's use of pretexting—the use of Social Security numbers and other personal information to trick telephone companies into giving private investigators telephone records—against reporters and board members came to light.

After an investigation, California prosecutors charged four people, including the former board chairman Patricia Dunn, with identity theft, conspiracy and other charges. On Feb. 28, Dunn and the other defendants in the case are expected to appear in court to set the date for the trial.

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Despite those troubles, HP posted solid fourth-quarter results, and separate reports by IDC and Gartner placed HP in the top PC vendor slot. During the fourth quarter, HP shipped 11 million PCs worldwide compared to the 9.5 million shipped by Dell. For 2006, the two companies were tied for the top spot.

"The company was really able to work it way through that by building a relationship with its customers," Claunch said, concerning the company's legal and ethical woes.

In other areas, HP also reported increases in revenue during the first quarter.

The company's Enterprise Storage and Servers division saw its revenue increase to $4.5 billion, an increase of 5 percent compared to the prior year. HP watched its industry-standard server revenue increase by 10 percent, with blade revenue, driven by its c-Class systems, increasing by 45 percent.

Storage revenue was flat with just a 3 percent increase. Any growth was led by an 18 percent increase in its midrange EVA (Enterprise Virtual Array) line but the company saw declines in its high-end array and tape offerings. The company also watched its business critical systems revenue decline by 6 percent.

In the call with investors, Hurd pointed to the company's storage business as an area that needs to be improved and promised to boost the division with new sales and channel strategies.

HP's Services division saw a revenue increase of 5 percent compared to last year. At the same time, the HP Software division saw revenue climb 81 percent to $550 million, which company officials attributed to its acquisition of Mercury Interactive and other companies.

Editor's Note: This story was updated to include comments from HP and analysts.

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