Annex Newsflash 2005-19                                May 17, 2005



Updated 5/18/05, 7:15 AM PDT (adds detailed business unit forecasts and valuations)

Analysis of HP's Second Quarter FY05 Business Results

Hurd's First RBI

Hurd Kicks Off His Tenure as CEO with Solid Quarter

PHOENIX, May 17 Mark Hurd, Hewlett-Packard's new captain, hit a single in his first at bat, as the company reported solid second quarter fiscal 2005 business results after the markets closed today.  Revenues were up 7% to $21.6 billion (up 4% in constant currency), while earnings rose to $966 million, up about 9% from the year before.

Wall Street liked what it saw and heard, boosting the HP stock by over four points in after-hours trading, and surpassing an earlier 12-month high, set after Hurd was appointed CEO.  The HP shares retreated somewhat after the company executives offered a lower guidance for the current quarter, but still ended up keeping a 3.5% after-hours gain.  Earlier in the day, HP shares had risen 2.6% in anticipation of positive results.

"We are in a sprint to get the company in shape to go run a marathon," Hurd said during a conference call. "We are not in a race just to do things. We need to do things that create a sustainable structure for going forward."

But the HP CEO also hinted at cost cuts in the weeks and months ahead.  "HP has a cost structure that is off-benchmark in many areas," he said. "Our overall performance leaves room for improvement in many of our businesses."

Geographies.  HP's performance echoed solid results at AccentureDell, Cisco, and Intel - the big three that have helped allay concerns sparked by IBM last month.  While Big Blue cited "soft economic conditions" as the reason for its weak results in Europe, HP's revenue in Europe rose 10 percent to $9.1 billion (up 4% on a constant currency basis).  

Of course, that's not nearly as robust as the growth that the above hardware trio's three or Accenture's (see the chart), for example.  But it is another confirmation that business on the Old Continent is not going to pot.

Some Cost Cuts Already Under Way

Printing and Imaging.  Three HP businesses have already started to cut.  The Printing & Imaging unit, whose revenue rose 5% in the quarter to $6.4 billion, but whose operating profit declined 15% to $814 million, offered a voluntary severance program.  This eliminated 1,900 jobs and led to $71 million in charges.

Within the printing and imaging business, consumer hardware revenue increased 3% (unit shipments up 13%), while business hardware revenue grew 8% (unit shipments up 12%). Supplies revenue, by far the biggest sub-segment, grew 4%.

Annex clients click here for a detailed HP Printing & Imaging forecast and valuation

ServicesHP Services unit, whose revenue grew 14% to $4 billion in the quarter, but whose operating profit also declined 12% to $292 million, reported a $74 million-charge related to workforce reductions.

Within the services business, Managed Services (outsourcing) revenue grew 27%, Technology Services (maintenance) grew 11%, and Consulting and Integration grew 10%.

Annex clients click here for a detailed HP Services forecast and valuation

Enterprise Servers and StorageThe Enterprise Servers and Storage business had its best quarter in several years.  Yet at the end of the day, its operating margin was still a mere 4.4%.  So this unit has also started to cut costs.  Included in the quarterly results is a $24 million workforce reduction charge.

During the second quarter, this HP unit reported operating profit of $184 million, or 4.4% of revenue, up from a profit of $119 million in the prior-year period.  By cutting costs despite the sharply improving profitability HP is clearly trying to get ahead of the curve, and may be provide some cushion for future price cuts.

The Enterprise Servers and Storage revenue was $4.2 billion in the latest quarter, up 6% over the prior-year period.  The "industry-standard" server revenue increased 12%, while business-critical systems (BCS) revenue grew 2%, and networked storage revenue was down 6%.

Annex clients click here for a detailed HP Enterprise Servers & Storage forecast and valuation and valuation

Personal SystemsHP PC business reported a 6% revenue growth in the quarter, with unit shipments rising 12%.  But an even better news for the HP shareholders was the improved profitability of this unit.  Operating profit rose from $44 million a year ago to $147 million in the latest quarter.  Alas, that's still only 2.3% of revenue.  Lean pickings and low margins are a way of life for commodity product providers. 

Within the PC business, desktop revenue increased 1% in the quarter, while notebook revenue grew 10%.  Revenue for commercial clients, which includes workstations, grew 3% over the prior-year period, while consumer clients revenue grew 10%.

Annex clients click here for a detailed HP PC business forecast and valuation

HP's profitability in the second quarter was helped by a reduced tax rate and the reversal of reserves on aged receivables.  But those items were offset by more greater-than-expected costs from voluntary staff reductions, and a charge related to sales taxes and use taxes from Compaq, prior to the merger.

Annex clients click here for a detailed HP Software forecast and valuation

Annex clients click here for a detailed HP Finance & Investments forecast and valuation

HP Eases Up on Buybacks

Another area in which HP has made some positive strides (backward) is its stock buyback.  The company scaled back its ambitious share repurchase program in the second quarter.  After a $2.2 billion surge in the fourth quarter stock buybacks, and a corresponding $637 million in the first quarter, HP spent "only" $618 million on share repurchases in the latest period.  The company also paid out $233 million in dividends during the quarter.


As for the future outlook, that's hard to predict until we learn what changes HP's new CEO has up his sleeve.  But that there will be changes, and that they will entail more cuts, is a certainty.  Hurd said the company would "provide details as soon as our plans are finalized."  

"What's clear to me already, even at this early stage, is that hard work lies ahead of us if we are to get HP's overall financial performance where it needs to be," Hurd told the analysts during a post-release a call.  

Hurd also ruled out a quick breakup of HP on a separate media call, something that many analysts and investors continue to call for (but not Annex Research - see the chart and "Hurd Advice: Up Mt. Market Cap," Apr 2005).

"I'm not working on spinning off anything, at least at this moment," Hurd told the reporters, according to a Reuters report.

So until HP decides what future strategies it will pursue, we'll refrain from trying to offer any long-term forecasts.  For the next quarter, the company said it expects revenues between $20.3 billion to $20.7 billion, with non-GAAP earnings per share in the range of $0.29 to $0.31, excluding about $0.06 per share from amortization of purchased intangible assets, and from approximately $100 million in workforce reductions.

Annex clients click here for a detailed HP Consolidated FY2005 forecast and valuation

Happy bargain hunting!

Bob Djurdjevic

P.S. For those among our readers who are not proficient in American sports terminology, the term RBI stands for "run batted in," a one-point score in a baseball game.

For additional Annex Research reports, check out... 

2005 IT: Hurd's First RBI (May 2005); Dell Rings the Bell (May 2005); Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005);  HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005);  Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Hurd Advice: Up Mount Market Cap (Apr 2005); Accenture: Roaring Ahead (Apr 2005);  Fujitsu Unveils New Servers (Mar 2005);  EDS Executive Suite; HP's New CEO (Mar 2005);  An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005);  An Upside-Down View (Mar 2005);   The Worst of Both Worlds (Mar 2005);   Octathlon 2005: Accenture Wins (Mar 2005);  IBM Global Services: Smaller, Shorter - Better? (Mar 2005);  IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005);  IBM Servers to Grow Again (Feb 2005);  Carly's Fickle Fans (Feb 2005);  CSC: Gearing Down on Purpose (Feb 2005);  EDS: Grossly Overpriced Stock (Feb 2005);  IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)

2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004);  IBM Server Renaissance (Nov 2004);  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)

Or just click on and use "financial engineering" or similar  keywords.

Volume XXI, Annex Newsflash 2005-19
May 17, 2005

Bob Djurdjevic, Editor
(c) Copyright 2005 by Annex Research, Inc. All rights reserved.

4440 E Camelback Rd #29, Phoenix, Arizona 85018
TEL/FAX: (602) 824-8111

The copyright-protected information contained in the ANNEX BULLETINS and ANNEX NEWSFLASHES is part of the Comprehensive Market Service (CMS).  It is intended for the exclusive use by those who have contracted for the entire CMS service.

Home | Headlines | Annex Bulletins | Index 2005 | About Founder | SearchFeedbackClips | Activism | Client quotes | Workshop | Columns | Subscribe