HP Profit Growth Driven by EDS, Laptop Sales

By Reuters -  |  Posted 2008-11-24

SAN FRANCISCO (Reuters) - Hewlett-Packard Co (HPQ.N: Quote, Profile, Research, Stock Buzz) posted a 21 percent rise in quarterly sales of notebook computers, and a near doubling in revenue from technology services thanks to its acquisition of Electronic Data Systems.

The gains more than offset modest drops in HP's printers and servers businesses, helping overall revenue rise 19 percent and net profit increase 4 percent in its fiscal fourth quarter ended October 31.

"We were impressed with the notebook revenue. They were easily able to outpace peers in a pretty tough environment," said Bill Kreher, an analyst at Edward Jones.

"They certainly benefited from the acquisition of EDS. It bears fruit in the results, which are still strong in my opinion. We have a buy rating."

HP's broad businesses, which include services, software, printers and ink supplies, has made it less vulnerable to the economic downturn than rival PC maker Dell Inc (DELL.O: Quote, Profile, Research, Stock Buzz). Dell also reported better-than-expected quarterly results, but mostly due to aggressive cost cuts.

HP's preliminary fourth-quarter report and fiscal 2009 outlook, issued on November 18, had blown past analysts' estimates at the time, sending its shares soaring. The company affirmed those figures on Monday, and gave additional details about its business divisions.

Chief Executive Mark Hurd said the No. 1 maker of personal computers is gaining market share in every segment, and is at or ahead of its integration plans for EDS.

He said HP's outlook was based on a cautious view of computer sales in what he called a challenging environment.

"We're guiding fairly conservatively" on PC sales and it will "have an effect across" the company, Hurd told reporters on a conference call.

Fiscal fourth-quarter net profit was $2.11 billion, or 84 cents per share, compared with $2.17 billion, or 81 cents per share, a year earlier. Profit per share excluding items, such as acquisition charges, was $1.03.

Fourth-quarter revenue rose 19 percent to $33.6 billion, or an increase of 16 percent when adjusted for currency effects.

EDS helped HP's services revenue jump 99 percent to $8.6 billion. Excluding EDS, services revenue rose just 10 percent.


HP said software revenue rose 13 percent to $855 million, while revenue from its enterprise storage and server division fell 1 percent to $5.1 billion. Revenue from its imaging and printing group fell 1 percent to $7.5 billion.

Hurd said HP planned to again increase prices on printing supplies in the first quarter due to exchange rate pressure from the Japanese yen.

"It's a cost pass-through more than anything. In this environment it's probably one of the few areas you can actually raise prices but you have to be careful," said Shannon Cross, of Cross Research.

HP posted a 21 percent increase in sales of notebook PCs, but desktop PC revenue fell 2 percent.

Asked how he would reconcile HP's view to Intel Corp's (INTC.O: Quote, Profile, Research, Stock Buzz) more negative outlook on PCs, Hurd said: "We saw some things that, to be blunt, were just different in our numbers."

He said he did not know the details of Intel, which had shocked markets earlier this month with a revenue warning.

Ashok Kumar, an analyst with Collins Stewart, thought HP's guidance was too optimistic about sales of equipment.

"If life cycles get extended from three years to four years that will have a dramatic effect on revenue performance and HP cannot sidestep it," he said.

HP shares, which gained 3 percent on the New York Stock Exchange earlier on Monday, ticked 1 percent lower to $35.30 in after-hours trading. The stock had lost about one-third of its value from September to mid-November, before gaining about 20 percent since the strong preliminary results.

The company stood by its forecast for first-quarter earnings of 93 to 95 cents per share excluding items, on revenue of $32 billion to $32.5 billion. It also confirmed its forecast for fiscal 2009 earnings of $3.88 to $4.03 per share excluding items, on revenue of $127.5 billion to $130 billion.

(Writing by Tiffany Wu; editing by Richard Chang)