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Analysis of Hewlett Packard’s Fourth Quarter Business Results

HP Hits Home Run

Solid Growth Across All Business Segments; Printers Most Profitable

PHOENIX, Nov 16 – After disappointing investors with its third quarter results (see HP Savaged by Wall Street, Aug 2004), Hewlett Packard hit a home run in its fourth and final quarter of fiscal 2004 (ended Oct 31).  Net earnings surged by 27% on record quarterly revenues ($21.4 billion, up 8% from a year ago). 

It was a complete turnaround, akin to Red Sox’s comeback last month against the Yankees.  Night became light as Red (Sox) shone bright. 


Business Segments

ESS.  The greatest improvement during the last three months occurred in HP’s Enterprise Storage and Servers (ESS) unit, the problem child of the third quarter.  Revenues surged (sequentially) from $3.4 billion to $4.1 billion, while operating profit swung by a whopping $315 million – from a $208 million loss, to a $107 million surplus.  Year-over-year, ESS fourth quarter revenues increased by 7%, while its operating profit declined 8%.


HPS. As predicted, HP Services’ revenues grew in double digits (up 13% to $13.8 billion), while its operating profit dropped by about 10%, ending the year with a 9.2% operating margin ($367 million).  Such is the life of a “megadeal” winner. 


Printers (IPG).  Meanwhile, while HPS will be a big profit contributor in the future, HP’s printing and imaging division (IPG) is doing it today.  Its operating profit margin of about 16% is by far the highest of any HP division.  In the fourth quarter, it actually improved to 16.6%, or $1.09 billion, on record revenues of $6.5 billion – the highest of any HP unit.


Printers and imaging are to HP what mainframes and servers used to be (and are becoming again) at IBM – a source of stability and profitability.  Printers, as mainframes, represent a platform from which to launch promising, but more risky ventures of the future.  


PC.  Personal systems revenues also grew at a healthy 9% rate in the fourth quarter, while its physical shipments jumped by 11% during the same period.  Although the PC revenues were just a shade lower than those of the printing and imaging (IPG) unit, they were far less profitable.  The PC unit produced a $78 million operating profit in the fourth quarter as compared to a $1.1 billion contribution by the IPG division.  But it at least it did not bleed any red ink which its brethren in the Big Blue camp seems to do in most quarters.


Software. Speaking of red ink brethren, while IBM software is its most profitable unit, HP software is losing money.  In FY2004, it had revenues of $922 million and an operating loss of $145 million, lower than the $190 million HP software lost a year ago. 

Since HP software is where the company is making strategic investments in support of its “Adaptive Enterprise” push (see IT Industry: Whither Goeth It?, Jan 2004), it can be equated with IBM’s “Enterprise Investments” unit - a perennial (and intentional) money-loser on IBM financial statements.  Its purpose is less to make money than it is to lead the corporation into new areas that P&L-driven units could not justify on their own.


Stock Buybacks

The same cannot be said of stock buybacks, a practice that both HP and IBM have embraced in the last several years.  To us, that’s a lose-lose proposition, in the long run.  Yet, HP has just ratcheted up its stock buyback program.  The company spent $2.2 billion on its own share repurchases in the fourth quarter alone.  For the full year, HP bought back $3.3 billion-worth of its stock.

And what does the company have to show for all this money?  Not much.  Take a look at the stock charts...



Overall, the fourth quarter marked a terrific finish for HP.  The company ended the 2004 season with a big home run.  Based on the company’s projections for FY2005, it looks like next year will be even more exciting and more profitable, too.


P.S. Also, check out the just-updated HP charts and tables in our print edition...

"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, and who are now reading the complete Annex Bulletin (11 pages in print edition), along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 IT: HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004);  To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004)IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004);  EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004);  IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)

2004 HP:  HP Hits Home Run (Nov 2004);; HP Savaged by Wall Street (Aug 2004); "HPS Wins by a Nose!" (Octathlon 2004); "A Passage FROM India" (Feb 2004);  "Still No Cigar" (Feb 2004); "Nokia Dials HP!" (Feb 2004)

2003 HP: "IBM vs. HP: And the Winner Is..." (Nov 2003); "Strong Finish Not Enough" (Nov 2003) "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)

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Volume XX, Annex Bulletin 2004-24
November 16, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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