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Annex Bulletin 2007-07 February 20, 2007
A CONFIDENTIAL client edition
Capgemini Caps Great Year, Saves Best for Last (Analysis of Capgemini's fourth quarter business results)
EDS: On Sunny Side of Street (Analysis of EDS' fourth quarter business results)
Updated 2/21/07, 10:15AM EST, adds Market Update
Analysis of Hewlett-Packard's First Quarter FY07 Business Results
Toward New Highs?
Revenue Grows in Double Digits; Profit Surges 31%
NEW YORK, Feb 20 - Hewlett-Packard's Mark Hurd did it again. Once again, his company has exceeded Wall Street expectations. And once again, HP did it the hard way - by growing both revenues and profits at the same time.
First quarter revenues rose 11% to $25.2 billion, while net earnings jumped 31% to $1.8 billion. And upward trends were evident in all of HP's lines of business. That's more than just music to Wall Street ears; that's pure symphony.
No wonder the HP stock rose to $43.13 in regular trading in anticipation of another solid quarter, closing just shy of the multi-year high set last month.
"This was a solid start to (the) year, (as) revenue grew, margins expanded and we continued to take market share," Hurd told the media after the results were release, but prior to the analyst teleconference.
Ironically, the HP shares gave up most of the earlier gain in after-hours trading despite its stellar latest business results. Go figure... Wall Street has never been known to overdose on logic.
Business Segment Analysis
PCs. Take the PC unit, for example. Yes, HP competitors, like Dell and Lenovo, have had their share of problems lately. But HP has had little to do with that. Hurd is evidently not the kind of CEO who "buys the business," as they say (drops prices and sacrifices profits to gain market share). HP's PC revenues grew 17% to $8.7 billion, while its corresponding operating profit rose 41% to $414 million since a year ago period.
Some of the HP growth in the PC business has clearly come at Dell's expense. But most of it seems to be coming from consumer markets. The holiday season has certainly given HP a big boost. They surged by 28% in the quarter (vs. 8% rise of commercial PC revenues and a 1% drop in desktop business). Notebook sales now account for nearly half of the total (see the chart). Maybe that's why Michael Dell beefed up his executive team yesterday by adding former Motorola executive to head up its consumer business?
Within the above totals, the supplies revenue, at 58% the largest I&P sub-segment, grew 11%, while the commercial hardware revenue grew 2% and consumer hardware was flat. Unit shipment volumes increased in all of the I&P product lines, some in high double digits.
Enterprise Servers & Storage (ESS). The ESS revenues rose 5% to $4.5 billion, while its operating profit jumped 28% to $416 million. While the corresponding operating margin of 9.3%, up from 7.7% a year ago, is the second best on record, not everything has turned up roses in this unit.
A 6% decline in "business critical servers," for example, was one of the few blemishes in an otherwise excellent quarter. The drop confirms that Sun Microsystems has been gaining share from HP in the Unix market, as was also evident from Sun's last month's excellent business results.
Asked to explain this blemish during the conference call, Hurd felt the drop was mostly due to relatively poor execution in this quarter, and should not be taken as a sign of any long-term malaise.
Meanwhile, HP's industry-standard (Intel-based) server revenue, the largest ESS sub-segment (60% of total), increased 10%, with blade revenue up 45%. Storage revenue rose 3%.
The Technology Services (maintenance), HPS' biggest segment at 54% of total revenue, grew 1% over the prior year period. Consulting & Integration and Outsourcing sub-segments were up 10% and 11% respectively.
Software. HP Software, on the other hand, received the biggest revenue boost of any HP unit. Benefiting from the Mercury acquisition, software surged 81% to $550 million. Operating profit was $47 million, or 8.5% of revenue, up from a profit of $9 million, or 3.0% of revenue, in the prior year period. And that's despite a write-down of certain costs and expenses related to the Mercury purchase. So it would seem fair to say that at HP, Mercury is rising. J
Excluding the effects of the Mercury acquisition, which closed in November, revenue increased 7% over the prior year period. HP OpenView grew 14% while HP OpenCall dropped 6%.
Geographies. Asia/Pacific was HP's fastest growing region in the quarter, rising 15% to $4.0 billion (up 12% in constant currency). Europe, the company's largest geographic unit, was also up in double digits as reported (up 14$ to $10.7 billion), but it rose only 6% in constant currency. The Americas region, the second biggest, grew 6% to $10.4 billion.
Financial Services. Financial Services' revenues grew by 10% to $547 million. They generated $32 million of operating profit for a margin of 5.9%. Including the Corporate Investments, this business segment grew 12.4% to $704 million.
About 55% of the total came from the Americas region, with Europe accounting for just a little over one third.
Outlook and Market Valuation
"We now expect second-quarter revenue to be approximately $24.5 billion, versus the current consensus estimate of $24.1 billion," she said. "Historically, revenue was roughly flat in constant currency from Q1 to Q2."
Thanks in part to a stronger than expected first quarter, HP boosted its full year revenue estimate to between $98.0 billion to $99 million, up from its prior guidance of $97 billion.
Lesjak also lifted the earnings estimates, both for the next quarter (to approximately $0.63 to $0.64 per share), and for the full year and full-year fiscal 2007 (to $2.60 to $2.65 per share), up from the prior guidance of $2.48 to $2.53, and versus current consensus estimates of $2.57.
"So all-in-all, we have a lot of work to do but lots of opportunities as well," Hurd said in his closing remarks. "I think it's a solid start to the year, and I am confident that we can continue to execute with discipline and deliver a year of strong financial returns."
In short, it looks like HP leaders think that the good news they've just reported for the first quarter will get better as the year goes on. Yet investors traded down the HP shares by 1.3% in after-hours session. Go figure, as we've said earlier.
Meanwhile, we find that the aggregate component value is now slightly higher than the actual HP market cap (click on the chart right to enlarge). So the stock appears to be pretty much priced in line where it should be relative to the P/E ratio of its various competitors. Anything much higher than that, could be considered a premium. And rationalizing that would require some logic and sanity. Maybe tomorrow morning?
Happy bargain hunting!
HP Stock Slides Nearly Three Points Despite Upgrades
"Barely Exceeding" Expectations Is No Longer Enough
NEW YORK, Feb 21 - Normally, a stock is supposed to rise when the company has a great quarter. HP had a great first quarter of its fiscal year 2007. Normally, share prices are boosted by analyst upgrades at prominent Wall Street firms. This morning, Goldman Sachs and Credit Swiss raised their estimates for HP. To no avail...
HP shares gave up $1.18, or 2.7%, to slide to $41.99 in early morning trading after the computer giant "gave a second-quarter forecast that barely exceeded Wall Street analysts' forecasts," reported the Dow Jones' MarketWatch after the markets opened.
So now, it's not enough to exceed the fickle investor expectations. Now, some companies get punished on the street called Wall when they "barely" surpass them. How perverted can the market get?
Such is the fate of Wall Street highfliers. No surprise there. We thought it would be instructive to revisit something we said back in November BEFORE HP's fourth quarter release (see "New King of the Hill," Nov 2006):
And that's all she wrote... for this quarter.
For additional Annex Research reports, check out... Annex
Bulletin Index 2007 (including all prior years' indexes) Or just click on SEARCH and use "company or topic name" keywords. Volume XXIII, Annex Bulletin
2007-07 Bob Djurdjevic, Editor 8183 E Mountain Spring Rd, Scottsdale, Arizona 85255 The copyright-protected information contained in the ANNEX BULLETINS 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.
For additional Annex Research reports, check out... Annex Bulletin Index 2007 (including all prior years' indexes)
Or just click on SEARCH and use "company or topic name" keywords.
Volume XXIII, Annex Bulletin
Bob Djurdjevic, Editor
8183 E Mountain Spring Rd, Scottsdale, Arizona 85255
The copyright-protected information contained in the ANNEX BULLETINS 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.
CSC: Where Less Seems More (Analysis of CSC's third quarter fiscal 2007 business results)
Fujitsu: Sales Up, Profit Down (Analysis of Fujitsu's third quarter fiscal 2007 business results)
IBM Shatters Records (Analysis of IBM's fourth quarter business results)
IBM Stock Passes Century Mark (Analysis of Big Blue's Stock Performance)
Happy Days Are Here Again (Analysis of Top 20 IT leaders' latest stock market and business performances)
Globalization Accelerates (Analysis of United Nation's annual survey of global investments)
IBM: A $125-Stock? (An update to "From Small Acorns Mighty Oaks Grow")
Capgemini: Longest Sustained Stock Price Rise (An update to "By Leaps and Bounds")
HP: New King of the Hill (Analysis of HP's fourth quarter business results)
IBM: From Little Acorns Mighty Oaks Grow (Analysis of IBM's "State of the Union")
Capgemini: By Leaps and Bounds (Analysis of Capgemini's preliminary third quarter business results)
Fujitsu: Good Performance Gets Better, More Global (Analysis of Fujitsu's first half FY2007 business results)
IBM: A Slam Dunk Quarter (Analysis of IBM third quarter business results)
IBM: Services in a Box (Analysis of IBM Global Services' Ground-shifting Announcements)
Strong Comeback by IT Stocks in Third Quarter (Analysis of top 20 IT companies' market and business trends)
Stock Buybacks: A Fading Fad (Dell, erstwhile "King of Fluff," suspends its stock buybacks)
Capgemini: Growth Continues (Revenues, net profit up in double digits, margins also improve)
Power of Manpower (While others move to India, Russia... AMD invests in New York, hailing "phenomenal" quality of its labor force)
Ebb Tide Lowers Most Boats (Analysis of EDS' and CSC's latest quarterly results)
IBM vs. HP: A Tale of Two Blues (Both companies are doing well in business, but only HP is favored by Wall Street; Big Blue trying to change that now with its new "India Opus") [Annex clients click here]