HP's strong quarter may have broad coattails 20 February, 2008 By Liam Lahey

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The results are good news for HP's partners. They show that HP is committed to building its business across all of the product categories, which opens up opportunities for the channel.

And HP's performance is on par or better than what the industry was expecting, analysts said, as given all of the discussion surrounding a recession, there were some concerns that HP would be hit last quarter. Instead, HP along with a number of other companies are showcasing that there may not be a recession after all. However, a lot of HP's numbers are coming from outside North America as the economy here continues to slow. Potentially it's good news for the industry as the APAC and Europe regions could keep things afloat, even if North America goes into recession.

"The results show that not only is HP committed, but that they are delivering," said Michelle Warren, senior IT analyst, Info-Tech Research Group. "The proof is in the pudding of course, and HP's partners are enjoying some desserts."

Revenue in the Americas grew eight percent on a year-over-year basis to $11.2 billion. Revenue grew 15 percent in Europe, the Middle East and Africa to $12.3 billion. Revenue grew 22 percent in Asia Pacific to $4.9 billion. When adjusted for the effects of currency, revenue in the Americas grew seven percent, revenue in Europe, the Middle East and Africa grew seven percent, and revenue in Asia Pacific grew 16 percent. Revenue from outside of the U.S. in 1Q08 was 69 percent, with revenue in the BRIC countries (Brazil, Russia, India and China) growing 35 percent over the prior-year period and accounting for nine percent of total revenue.

Warren Shiau, associate partner, senior IT analyst, The Strategic Counsel, said it's ironic how a return to operational excellence is what got HP turned around.

"PCs and servers looked like the big drivers. HP has been strong in these areas for many quarters now, so this isn't a surprise," he said. "A good sign for HP is that even though Dell is getting back on track, HP is still putting up super strong numbers."

HP's Personal Systems Group (PSG) revenue grew 24 percent year-over-year to $10.8 billion, with unit shipments up 27 percent on a year-over-year basis. Notebook revenue for the quarter grew 37 percent over the prior-year period, while desktop revenue grew 15 percent. Commercial client revenue grew 22 percent year-over-year, while consumer client revenue increased 29 percent. Operating profit was $628 million, or 5.8 percent of revenue, up from $414 million, or 4.7 percent of revenue, in the prior-year period.

"The desktop and notebook divisions both performed really well. In future quarters, I would like to see stronger growth in the other categories -- particularly ESS, software and financial services, as the profit line is a bit more robust there," Warren remarked. "That being said, the growth experienced across all of the product lines is notable -- 19 percent in software really speaks to their growing commitment to becoming a full-service IT organization, versus just being recognized as being a PC company."

From a global perspective, HP experienced robust growth across all market segments, she added.

"I particularly like the fact that 69 percent of their sales occurred outside of the U.S.," Warren told eChannelLine. "They have struggled in Asia-Pacific in the past. It is an intensely competitive market due to the particular strong competition, and the cultural differences (notably, opting for Asian products versus American brands). HP's robust increases speaks to their ability to correctly assess the market climate, and execute accordingly."

Imaging and Printing Group (IPG) revenue grew four percent year-over-year to $7.3 billion. On a year-over-year basis, supplies revenue grew 6 percent, commercial hardware revenue grew seven percent and Consumer hardware revenue declined five percent. Printer unit shipments increased 1 percent year-over-year, with consumer printer hardware units down 2 percent and commercial printer hardware units up 13 percent. Momentum in key growth initiatives continued, with solid growth in both the graphic arts and the enterprise businesses. Operating profit was $1.2 billion, or 15.7 percent of revenue, up from $1.1 billion, or 15.3 percent of revenue, in the prior-year period.

Enterprise Storage and Servers (ESS) reported revenue of $4.8 billion, up nine percent over the prior-year period fueled by ESS blades, which grew 81 percent. On a year-over-year basis, industry-standard server revenue increased 11 percent. Storage revenue grew 10 percent, with revenue growth of 14 percent in the midrange EVA line. Business critical systems revenue increased one percent, with Integrity systems growth of 37 percent offset by declines in PA-RISC and Alpha. Operating profit was $673 million, or 14 percent of revenue, up from $453 million, or 10.2 percent of revenue, in the prior-year period.

Industry speculation suggested HP's solution providers are concerned about the gap in the vendor's storage line. Right now, noted Rob Enderle, principal analyst for The Enderle Group, EMC is the company to watch with storage.

"I find it somewhat ironic that IBM no longer makes this list given they founded it," he said. "Dell has suddenly become incredibly aggressive here, suggesting these two firms are moving powerfully in what has traditionally been a very staid business. This is an area that could likely use more focus from HP than it is getting as a result."

HP Services (HPS) revenue increased 11 percent year-over-year to $4.4 billion. Revenue in outsourcing services grew 15 percent, followed by consulting and integration and technology services, which grew 13 percent and nine percent, respectively, over the prior-year period. Operating profit was $489 million, or 11.2 percent of revenue, up from $406 million, or 10.3 percent of revenue, in the prior-year period.

HP Software revenue grew 11 percent over the prior-year period to $666 million, led by 19 percent growth in the business technology optimization portfolio. Operating profit was $51 million, or 7.7 percent of revenue, up from $18 million, or three percent of revenue, in the prior-year period. This result showcased that it takes awhile to get benefits from acquisitions straightened out and it provides a cautionary warning to others in that space planning on growing through acquisition, Enderle remarked.

Meanwhile, HP Financial Services (HPFS) reported revenue of $642 million, an increase of 17 percent year-over-year. Financing volume and net portfolio assets increased five percent and 14 percent, respectively, over the prior-year period. Operating margin was 6.7 percent of revenue, up from 5.9 percent in the comparable period last year.

HP said it generated $3.2 billion in cash flow from operations for the quarter. Inventory ended the quarter at $7.9 billion, while accounts receivable of $12.4 billion were up over the prior-year period. Accounts payable ended the quarter at $11.2 billion down from the prior-year period. HP's dividend payment of $0.08 per share in the first quarter resulted in cash usage of $206 million.

Looking ahead, HP estimated 2Q08 revenue would be approximately $27.7 billion to $27.9 billion.

Enderle said HP's printing and imaging divisions remain the strongest revenue engine it has with the strongest large-scale growth coming from the PSG (PC) group.

"It is the combination of these two that currently form the basis for HP's big numbers," he said. "The printing and imaging market continues to slow as we finally start to move away from paper and to electronic methods of data delivery. Today the vast amount of growth for information delivery is electronic and at some point print will drop into decline."

On the PSG side, Enderle said Lenovo and Dell are both becoming increasingly aggressive, and starting to challenge HP's retail dominance, even Acer is showing up (though acquisition) as a potential major threat.

"Staying ahead of these competitors will be increasingly difficult and require a level of agility that will challenge even the new HP," he said.

HP estimated the full year 2008 revenue would be approximately $113.5 billion to $114 billion.