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Confidential Annex Research Client Edition
Analysis of Hewlett Packard Services
(HPS) Fourth Quarter Results
Strong Finish Not Enough
HP Stock Gives Up Its Earnings Announcement Gains
– Hewlett Packard (HP) ended its fiscal year 2003 with a bang.
Revenues grew in double digits (up 10% to $20 billion), while
earnings more than doubled in its fourth quarter ($862 million vs. $390
million in FY02). Both
figures exceeded Wall Street’s expectations.
No wonder the HP shares rose 2.4% in
after-hours trading that followed the earnings announcement. They had also jumped nearly three points earlier the same day
But that’s all she wrote. For, the following day (November 20), the HP stock dropped to $21.59 - below the level it had traded before the earnings release.
The ostensible reason was Wall Street’s
concern with HP profit margins, and its alleged fears that HP may not be
able to sustain its stellar performance relative to competition.
Both “concerns” are bogus.
Wall Street dumped HP because it saw better opportunities elsewhere
(not necessarily in the IT sector). Investment
cash flows will win out any day on Wall Street over profit margins.
Just consider the facts…
The HP gross margins only dropped half a point
(from 25.9% to 25.4%). Other
companies’ margins, meanwhile, have been known to drop several points
only to be greeted with a shrug from Wall Street (e.g., “Small
Is Now Big at Big Blue,” Oct 2003).
Furthermore, HP’s operating profit in the
fourth quarter has been by far the best so far this year ($1.07 billion;
5.4% margin). More
importantly, for the first time this year, all HP lines of business
operated in the black. No
wonder the HP CEO, Carly Fiorina, gloated over her company’s latest
“We delivered on our commitments,” she
said in a teleconference with analysts that followed the earnings release.
“The results validated the success of the (HP-Compaq) merger.”
She added that the latest quarter has been “by far the strongest
since the merger.”
Well, a strong finish was evidently not enough
on Wall Street. Nor was
HP’s balanced performance.
Services. Hewlett Packard Services (HPS), for example, grew its
revenues by 5%, both sequentially and over the last 12 months. The $3.23 billion fourth quarter revenue was also its best
during the current fiscal year.
For the full year, HPS revenues were $12.3
billion, virtually flat with the pro-forma combined HP-Compaq revenues
from the prior fiscal year. But
the “managed services” segment (read “outsourcing” - $2.1 billion or 17% of total) surged by 36% in the fourth
quarter, while the “customer support” (i.e., “maintenance” - $7.7
billion or 63% of total) rose by 5%.
Revenues from the “consulting and systems integration” area
($2.5 billion, or 20% of total) declined by 10%.
quarter was also HPS’s most profitable period by far.
Its $393 million operating profit yielded a 12.2% margin – the
year’s best. For the full
year, HPS’s operating profit was $1.37 billion – an operating margin
of 11.1%, up from 8.3% in FY02.
The improvement in HPS profit margins, after
adjusting for merger-related charges, is even more apparent.
The operating profit in the latest fiscal year has more than
doubled – from $605 million (4.9% margin), to $1.24 billion (10.1%
Hardware. Among the HP hardware units, as usual, the Imaging and
Printing group was the best performer.
Its fiscal year 2003 revenues grew by 11% to $22.6 billion, while
its operating profit jumped to $3.6 billion, for a 15.8% operating margin.
Business hardware was up 6%, home hardware up
5%, while supplies rose 14%. The
imaging revenues were up 18%.
The Enterprise Systems group, the home of HP
servers, has been racking up losses quarter-after-quarter.
But it also turned in a $106 million profit in the fourth quarter,
on revenues of $4.07 billion. For the year, revenues were up 2% to $15.4 billion, led by
increases in online storage (up 9%).
The Personal Systems group also had its
strongest quarter of the year, with revenues of $6 billion, up a full
billion dollars from the previous quarter.
For the full year, this HP unit had revenues of $21.2 billion, up
19% over the fiscal year 2002.
The PC unit also eked out a small profit in
the fourth quarter ($21 million), following a $56 million loss in the
previous three-month period. This
means that for the full year, the HP PC unit has earned $19 million –
for a 0.09% operating margin.
Even such minuscule margin, of course, beats
the losses that the Big Blue PC unit keeps piling on nearly every quarter
on revenues half the HP PC’s size.
Makes you wonder why some of these companies
stay in the PC business, doesn’t it?
Probably because somebody has to… (besides Dell, of course).
Or does it?
For additional Annex Research reports, check out...
2003 HP: "An HP Hat Trick (March 2003); EXCERPTS - Analysis of Hewlett Packard Services FY02 results (May 2003); 2003 Global IT Services Heptathlon (May 23, 2003); Analysis of “Top 10” IT Leaders’ Market and Business (June 2003)
Volume XIX, No. 2003-20
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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