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EDS Helps HP Exceeds Profit Projections

EDS Helps HP Earnings Exceeds Profit Projections
Thanks to continued strength in its services business, a jump in PC sales and some cost-cutting, HP on Monday reported an increase in profits despite a decline in revenue.

The second-largest IT vendor in the world behind IBM, HP (NYSE: HPQ) reported sales for the quarter ended Oct. 30 reached $30.8 billion, down eight percent from the $33.6 billion reported in the same quarter last year.

The company reported non-GAAP net income of $2.8 billion, or $1.14 a share, excluding one-time items, a 14 percent gain against the profit of $1.03 a share for the same quarter last year.

Analysts polled by Thomson Reuters had projected a profit of $1.13 a share on sales of $30.4 billion.

For its fiscal year, HP reported revenue of $114.6 billion, down three percent compared with fiscal 2008, but up one percent when adjusted for the effects of currency. Non-GAAP operating profit was $12.6 billion, and non-GAAP diluted earnings were $3.85 per share, up from $3.62 in the prior-year period.

It was a big year for HP, between the EDS acquisition and the pending purchase of 3Com. But some of its business units are still hurting.

Services revenue grew 8 percent year-over-year to $8.9 billion in the fourth quarter, while the Personal Systems Group (PSG) posted an increase of unit shipments of 8 percent although revenue declined 12 percent to $9.9 billion. Enterprise Storage and Servers revenue fell 17 percent year-over-year, HP Software revenue declined 16 percent, and revenue from the Imaging and Printing Group (IPG) fell 15 percent.

"In the fourth quarter, HP continued to execute, delivering solid performance and building for the future," said chairman and CEO Mark Hurd on a conference call with analysts.

HP reported $3.4 billion in cash flow for the year and committed $2.1 billion in stock buybacks. All told, HP has committed to $12 billion in stock buybacks, triple its original plan.

Hurd said the EDS integration has gone well, with 19,000 of the 24,500 headcount reductions already done. "Customer retention and satisfaction remain high. This is now a business that can compete and win. We are positioned to grow," he said.

Hurd singled out the Imaging and Printing Group (IPG) for notice, saying that channel inventory headwinds are behind the company and demand is improving for printers. The unit gained share sequentially, and expects double digit unit growth in Q1.

Hurd also said the company saw "good consumer acceptance of Windows 7. We have gained double digit market share in enterprise, and are well positioned to win when enterprises upgrade to Windows 7."

When asked about it's recent offer to buy 3Com, Hurd replied: "We looked at a number of networking companies and felt 3Com had the best technology in the industry in addition to having a broad and complimentary set of products," he said.

He added: "We've had a strategy around converged infrastructure for some time, the ability for customers to see servers, storage networking all working together in a common capacity. Our strategy has been consistent. We want to align software and services to that. Networking is a key component. Number one thing we get back from customers is 'we'd like more.' So to us, adding to that portfolio was an objective we wanted to get done."

Upside to 3Com deal

He also said 3Com will help HP grow in China, which is a plus because China is so strong.

CFO Cathie Lesjak said that revenues in the U.S. and China were down just one percent, while EMEA (Europe, Middle East, Africa) were off 10 percent and was her biggest concern. "The U.S. and China are 40 percent of our revenue and are showing signs of improvement. While Europe is showing signs of stabilizing, we have yet to see signs of improvement," she told the analysts.

For Q1 of 2010, HP projects revenue of between $29.6 billion to $29.9 billion, with non-GAAP earnings per share of $1.03 to $1.05. It projects fiscal 2010 revenue of between $118 and $119 billion, with EPS of between $4.25 and $4.35. Lesjak said the softness in EPS projections was due to continued economic uncertainty in Europe.

Updated to add comments from the earnings call.