HP reports higher revenue, profit

The Palo Alto, Calif.-based company said net income rose 26 percent from US$1.2 billion to US$1.5 billion, or from 42 cents per share to 55 cents, for its first quarter of fiscal 2007 ending January 31. Revenue jumped 11 percent, from US$22.7 billion to US$25.1 billion, it said.

Revenue from the company's PC group jumped 17 percent to US$8.7 billion in the quarter, and the software group's revenue increased 81 percent to US$550 million, buoyed by HP's acquisition of Mercury Interactive, the company said. The company also announced ceasing investments in its pension plan for certain employees, directing a resulting US$500 million gain into an early retirement plan, and instead will offer a more lucrative 401(k) plan.

"It was a good start to the year with another solid set of results," Chief Executive Mark Hurd said in a conference call with reporters, pointing to improved profit margins and broad revenue growth. And he raised guidance for financial performance of the current quarter, boasting that it's the sixth consecutive quarter he's done so.

Factoring out some one-time charges, the company had net income of 65 cents per share--3 cents better than the average prediction of analysts surveyed by Thomson First Call. HP also exceeded those analysts' revenue projection of US$24.3 billion by about US$800 million.

However, Sanford C. Bernstein analyst Toni Sacconaghi cautioned in a report Friday that earnings guidance issued by HP is typically conservative, and that investors have begun factoring in that practice. Consequently, many expected HP to beat analyst earnings-per-share expectations materially, he said.

Indeed, in after-hours trading, HP stock dropped 53 cents, or 1 percent, to US$42.60.

HP forecast revenue of US$24.5 billion for the second quarter of fiscal 2007, a notch above the US$24.1 billion expected by analysts. Earnings per share are expected to be 63 to 64 cents, he said, which compares cleanly to 63 cents expected by analysts.

"The Personal Systems Group continues to perform very well," Gartner analyst Carl Clauch said, adding that another strong point was the "rapid absorption of Mercury into the software business (that improved) already impressive margins there."

Hurd expressed pleasure at the PC business gains--in particular the simultaneous gains both in market share, with a 19-percent unit shipment increase, and in operating profit, which increased from US$293 million the previous year to US$414 million. HP's PC market share surged at the end of 2006 at the expense of No. 2 Dell, which trails by a significant margin.

"You can get more share, but you may not like the results. Being able to be both is key," Hurd said. "I'm particularly pleased we achieved these share gains while posting record operating margins."

Imaging and printing revenue increased 7 percent to US$7 billion, with revenue from printing supplies such as paper and ink cartridges increasing 11 percent and printer unit shipments increasing 18 percent. And printing continues to be HP's cash cow, with operating profit of US$1.1 billion despite the smaller revenue base compared to the PC business.

Kodak hopes to win some business by promising lower-cost ink cartridges, but Hurd professed to be unworried that profit margins will be affected or that an ink cartridge price war might erupt.

"To be blunt, I like our chances to be pretty competitive," Hurd said. "It all comes down to being able to deliver value to customers."

For servers and storage systems, HP revenue increased 5 percent to US$4.5 billion. The strong points were the company's ProLiant line of x86 servers, whose revenue increased 10 percent over the year-earlier quarters.

High-end servers, though, were weaker. Revenue declined 6 percent in the Business-Critical Systems group, with a 75 percent increase in Itanium-based Integrity server revenue offset by declines in PA-RISC- and Alpha-based systems being phased out.

"We're still concerned they're not delivering the kind of revenue growth with the high-end server and storage business that they ought to be," Claunch said. "It's the one area in the company that's not shining."