HP reports solid Q4 on services growth

Revenue was down in almost all divisions except for HP's large services business

Hewlett-Packard reported an 18 percent jump in profit for its fiscal fourth quarter, thanks to cost-cutting efforts and the strength of its services business.

HP's profit for the quarter ended Oct. 31 was US$2.4 billion, or $0.99 per share, up from $2.1 billion, or $0.84 per share, in the same quarter last year, the company announced Monday. Revenue fell 8 percent to $30.8 billion.

HP had already announced preliminary results two weeks ago, when it disclosed plans to buy 3Com for $2.7 billion. Monday's results provided a closer look at how each business division performed.

Revenue was down in almost all segments, including Enterprise Storage and Servers, where it slipped 17 percent to $4.2 billion, and the Personal Systems Group, where it fell 12 percent to $9.9 billion. Revenue in the company's printing and imaging group also shrank, by 15 percent to $6.5 billion, HP said.

But as with the previous quarter, services was a bright spot. Revenue from that group increased 8 percent from a year earlier to $8.9 billion, HP said. Its operating profit from services increased to 16.2 percent of revenue, up from 11.4 percent a year earlier, and contributed $1.4 billion to HP's bottom line.

HP has cut about 19,000 jobs from the services group since it closed its EDS acquisition last year, and that work is now almost complete, Chairman and CEO Mark Hurd said on a conference call.

As it reported two weeks ago, HP's outlook for 2010 improved slightly during the last quarter. It expects 2010 revenue of $118.0 billion to $119.0 billion, up from its prior estimate of $117.0 billion to $118.0 billion, and earnings per share of $3.65 to $3.75, up from $3.60 to $3.70.

For the current quarter, HP expects to report revenue of $29.6 billion to $29.9 billion, and profit before one-time items of between $1.03 and $1.05 per share, the company said.

However, those estimates don't include the impact on its business of buying 3Com, HP said.

HP's results contrasted with those of Dell, which last week reported lower-than-expected figures for roughly the same period. Dell's profit slumped 54 percent from a year earlier, to $337 million, while revenue fell 15 percent to $12.9 billion.

Dell is more dependent than is HP on business spending, which has picked up more slowly than consumer spending after the recession. It also lacks a services business on the scale of HP's and IBM's, which provide those companies with better profit margins.

However, Dell said it had been encouraged by an uptick in business spending at the end of last quarter and was optimistic about the rest of the year.

Earlier Monday, Gartner said it expected PC shipments to increase 2.8 percent this year, much better than its forecast of a 12 percent decline at the start of the year. It expects revenue from PC sales to fall by 11 percent, however, in part because consumers are buying low-cost netbooks instead of full-featured PCs. HP's own desktop and notebook sales were down from the same quarter last year but up from the previous three months. The same was true for industry-standard servers, storage, and even its pricier Nonstop Integrity systems.

HP has been cutting costs in its printing group, allowing profits to stay level at $1.2 billion despite slower sales. The group is "poised for recovery," Hurd said, and HP expects printer shipments to increase by a double-digit percentage in the current quarter, he said.

Europe continued to be a tough spot for HP, with revenue down 17 percent, or 10 percent allowing for currency fluctuations. Revenue from China increased more than 20 percent from the previous year, HP said.

With the integration of EDS almost complete and the 3Com acquisition on the horizon, HP is in a position to "outperform the market" next year, Hurd said.

"EDS is an enormous asset that we are just beginning to leverage, to sell not only services but also pull-though hardware and software," he said.

The 3Com deal builds on HP's strategy to sell its customers servers, storage and networking gear. It also provides another avenue to sell HP's VirtualConnect networking software, which is sold today mainly with HP's blade servers, Hurd said.

"We go into the next year certainly feeling good about our position," Hurd said.

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James Niccolai

IDG News Service
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