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HP Delivers on Expectations

HP Delivers on Expectations

The market was dying for upbeat Q4 results from HP Wednesday and got them, giving rise to an after-hours buying flurry on Wall Street and a certain general buoyancy on Thursday. HP ended the day up 13% to 19 bucks and change.

The company beat earnings estimates by two cents and bested revenue projections by several hundred million dollars. It made $721 million, 24 cents a share pro forma ($390 million or 13 cents in reality), on revenues of $18 billion, up 9% sequentially, down 1% year-over-year.

The results are heavily tied to HP’s cost-cutting program, which is ahead of schedule. Costs have been trimmed $651 million so far, 30% more than it thought, translating into 16 cents a share. Merrill Lynch was impressed with the revenue upside since “HP is universally considered a cost-cutting story.”

HP is also going to cut 1,100 more jobs than it’s been saying, bringing the total number of redundancies to 17,900.

Happily all business and geographies posted sequential revenue gains – year-over-year comparisons are rather more unpleasant, shall we say – and the company said it saw strong 26.5% gross margin improvement, again attributed mostly to cost cutting.

It also said it made significant sequential operating profit improvements in its problem children, its unprofitable enterprise systems and PCs, as well as services and its star imaging and printing interests, managing to generate $1.5 billion in cash from operations, giving it $11.8 billion in the bank.

Enterprise systems, which management said will be last to return to profitability or even to hit breakeven, cut its operating losses by 60% sequentially. It was only down $152 million, a $270 improvement over the previous quarter. Revenues were up 8% sequentially, but down 5.1% year-over-year to $4.1 billion. The unit’s operating margin was negative 3.7% compared to negative 11.2% last quarter and negative 7% a year ago.

The company claimed that software and the Alpha systems it inherited from Compaq were its only real losers, meaning its Unix and Intel servers must be profitable. Ditto storage.

Business-critical server revenue was up 12% sequentially, down 14% year-over-year. Unix revenues grew 14% sequentially and were flat year-over-year. Intel server revenue was up 4% sequentially and up 3% year-over-year. (The company thinks it’s established its strongest pricing position in industry-standard servers in a long time and swears it will remain competitive.) Storage revenues were up 14% sequentially, down 5% year-over-year. Software revenues were up 2% sequentially, down a nasty 15% year-over-year.

The PC operation cut its operating losses by 56% to $87 million. PC revenues came to $5.1 billion, up 6% sequentially, down 6% year-over-year. Consumer PC revenue was up 16% sequentially, down 13% year-over-year, and business PC revenue increased 3% sequentially and remained flat year-over-year. The operation’s operating margin was negative 1.7%, compared to negative 4.2% last quarter and negative 7% a year ago.

Printing, the source of HP’s profits, recorded double-digit sequential growth in revenues, up 18% sequentially to $5.6 billion, and earnings, up 14% sequentially to $926 million.

Services also returned to double-digit profitability, up 39% sequentially, but down 10% year-over-year to $381 million. Service revenues were up 4% sequentially, down 3% year-over-year to $3.1 billion. Support revenues were up 4% sequentially, flat year-over-year. Revenues from managed services were up 4% sequentially and 14% year-over-year as a result of outsourcing HP said.

HP said its strongest performer was Europe where revenues were up 14% sequentially despite the fact that France and Germany are the only places where the HP-Compaq sales forces haven’t been integrated. Unions, you know.

The Americas were up 7% sequentially, down 3% year-over-year. (HP ran into a string of bad debts, some $116 million worth, in Latin America.) The US alone was up 9% sequentially and year-over-year. Asia-Pacific was up 6% sequentially, down 2% year-over-year.

Still, despite the progress, HP CEO Carly Fiorina would only interpret the numbers as validating the HP-Compaq merger and reiterated the position that the integration of the two companies was “meeting or exceeding goals.” Carly’s assurance notwithstanding, doubts about the merger’s wisdom are still rampant.

Merrill remarked that HP’s “future after cost reductions is murky” and said that it was “looking for clearer differentiation of HP’s computer business.” It believes HP is “too dependent on hardware in its computer business and on printer profits overall,” and says, “HP will need to boost its software and service revenues, perhaps through acquisitions.” It toys with the idea of an HP-EDS combo once Compaq is integrated.

Otherwise, Carly has seen “no clear signs of sustained improvement,” “no improvements in IT spending or increases in capital spending” and is “not counting on a strong holiday buying season.” Christmas will be like the lackluster back-to-school season, she said, deferring further prognosticating to the company’s analyst meeting in San Francisco on December 3-4.

As expected, HP affirmed Wall Street’s revenues estimates of $18.4 billion for the first quarter and pro forma EPS of 27 cents. Credit Suisse wondered how it can do those numbers if Christmas comes in one-third short of normal demand. It thinks the Q1 projection is optimistic. Dell, by the way, thinks Christmas is going to be a lot better than Carly does.

The departure of short-lived HP president Michael Capellas was “expected,” she said, and “would have no impact short term or long term,” an odd remark considering HP’s heady Q4 performance can probably be laid to operational execution and Capellas was the operations boy.

As of Halloween, the company had terminated 12,500 people, 8% of its combined staff, out of its 16,800 target. There appears to be extra 1,100 empty seats in Japan not tallied with the total that were vacated thanks to a voluntary separation program. HP lost another 4,000 people to attrition but hired 4,000 in printing and services. The 6,000 people HP lopped out of servers helped improve that unit’s complexion.

HP is on a crusade to trim overhead by $3 billion. Merger-related cost saving for the second half came to $651 million, 30% above plan: $257 million from workforce reductions, $243 million from procurement savings and $151 million from cuts in facilities and marketing programs.

HP has been cutting prices to stay competitive, but Carly now thinks the pricing environment has stabilized and promises that profitability will take priority over share. She claimed the company “doesn’t need more revenue for profitability.” Enterprise systems and PCs, by the way, are supposed to return to profitability next year.

The company is trying to move to more of a direct model while two-thirds of its revenues come from the channel. The continued loyalty of its dealers under the company’s new PartnerOne program is now suspect and may cost it share.

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More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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