HP: Revenue Increases 10 Percent But Profits Taxed

Despite the tumult brought on by a dramatic reorganization of its struggling business and a historically weak season, Hewlett-Packard posted strong, double-digit revenue growth in several of its key business segments for its third fiscal quarter ended July 31.

Overall, revenue grew 10 percent to $20.8 billion. However, the company's earnings did not keep pace with revenue growth. HP reported net income of just $73 million, or 3 cents a share, as a result of tax adjustments from the repatriation of $14.5 billion in foreign earnings. Take that write-off away, though, and net income was $1.06 billion, or 36 cents a share. Consensus forecasts were at 31 cents a share.

HP's enterprise business--under the microscope by the company's new president and CEO, Mark Hurd, and industry observers, in general--improved markedly. Enterprise servers and storage revenue increased 20 percent, reaching $4 billion, and profits increased 3.8 percent, or $150 million.

That's a nice turnaround, considering that same segment saw its revenue decline 5 percent, while losing $211 million during the same period last year, when it was unable to fulfill orders for months, thanks to a faulty supply-chain system overhaul. The company's storage revenue was up 15 percent for this year's third quarter.

Hurd, who last quarter described the company's underperforming enterprise server, storage and software business as "off benchmark," said Tuesday that the business is turning around, thanks to key product refreshes of its EVA storage line, among others, and help from the channel."Over the last few quarters, we've been working hard on key initiatives in storage, with product refreshes, the hiring of sales specialists and improving our alignment with enterprise VARs," Hurd said during Tuesday's earnings call. But he stopped short of saying the business has turned around.

"No one is taking a lap around the building here to celebrate the performance in storage," Hurd said. "We've got more work to do in storage--we know it--and we will do a better job at getting that done."

That said, partners familiar with the company's struggles were encouraged. For example, Mark Darlington, COO of HP Gold enterprise partner Trilogy Solutions, said the improvement was promising.

"While the third quarter last year sucked, these results were pretty good," Darlington said.

In HP's Personal Systems Group, revenue was up 8 percent, to 6.4 billion, while unit shipments increased 14 percent. The group posted a profit of $163 million, or 2.6 percent of revenue, up from $23 million year-over-year. Hurd said that represented HP's best showing ever in the personal systems segment. While its desktop business declined slightly, a refreshed notebook line overcompensated for that growing 21 percent.Imaging and printing revenue increased 5 percent, totaling $5.9 billion, up only 1 percent, though unit shipments were up 8 percent, reflecting increased competition in the segment. Margins tightened as well, with profits declining from $836 billion to $771 million.

The services business grew 10 percent, to 3.8 billion, and its managed-services revenue grew 21 percent. Operating profit declined from $314 million to $256 million, much of that due to bonus accruals as a result of the strengthened business.

HP's money-losing software business was up 11 percent, posting $249 million in revenue, and losses were marginally less, $40 million, compared to $48 million.

"It's clear the profitability of our software business needs to be improved," Hurd said. "You will see us work really hard on the cost structure of the business in productivity metrics to ensure we deliver acceptable growth and profitability."