HPQ: HP Reports Third Quarter 2006 Results

HP today announced financial results for its third fiscal quarter ended July 31, 2006, with net revenue of $21.9 billion, representing growth of 5% year-over-year, or 6% when adjusted for the effects of currency. GAAP operating profit was $1.5 billion and GAAP diluted earnings per share (EPS) was $0.48 per share, up from $0.03 in the prior year period. GAAP financial information for the third quarter 2005 reflects a tax adjustment resulting from HP's decision to repatriate $14.5 billion in cash from foreign earnings.

Non-GAAP operating profit was $1.7 billion, with non-GAAP diluted EPS of $0.52, up from $0.36 in the prior year period. Non-GAAP financial information excludes $108 million of adjustments on an after-tax basis, or $0.04 per diluted share, related primarily to amortization of purchased intangibles. GAAP and non-GAAP financial information include stock-based compensation expense in the current financial period only.

"HP delivered another solid quarter with strong revenue growth, improved margins and healthy cash flow," said Mark Hurd, HP chief executive officer and president. "We gained share without sacrificing margins and continue to execute well against our long-term plan. This is visible in our third quarter results and improved fourth quarter outlook."

Q3 FY06 Q3 FY05 Y/Y

Net Revenue ($B) $21.9 $20.8 5%

GAAP Operating Margin 6.9% 4.4% 2.5 pts
GAAP net income ($B) $1.4 $0.1 1784%
GAAP diluted EPS $0.48 $0.03 1500%

Non-GAAP operating margin 7.6% 5.7% 1.9 pts
Non-GAAP net income ($B) $1.5 $1.1 40%
Non-GAAP diluted EPS $0.52 $0.36 44%

Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below.

During the quarter, on a year-over-year basis, revenue in the Americas grew 8% to $9.7 billion, revenue in Europe, the Middle East and Africa grew 2% to $8.4 billion, and revenue in Asia Pacific grew 7% to $3.8 billion. When adjusted for the effects of currency, revenue in the Americas grew 7%, revenue in Europe, the Middle East and Africa grew 3%, and revenue in Asia Pacific grew 8%.

Personal Systems Group

Personal Systems Group (PSG) revenue grew 8% year-over-year to $6.9 billion, with unit shipments up 14%. On a year-over-year basis, desktop revenue increased 5% and notebook revenue grew 14%. Commercial client revenue grew 4% year-over-year, while Consumer client revenue increased 17%. Operating profit was $275 million, or 4.0% of revenue, up from a profit of $163 million, or 2.6% of revenue, in the prior year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue grew 5% year-over-year to $6.2 billion. On a year-over-year basis, supplies revenue grew 9%, commercial hardware revenue grew 3% and consumer hardware revenue declined 3%. Printer unit shipments increased 15% year-over-year, with consumer printer hardware units up 13% and commercial printer hardware units up 23%. Momentum in key growth initiatives continued, with All-in-One unit shipments up 17% year-over-year, color laser printer shipments up 70% and printer-based MFP shipments up 196%. HP Indigo Press printed page volume grew 37% over the prior year period. Operating profit was $884 million, or 14.2% of revenue, up from a profit of $771 million, or 13.0% of revenue, in the prior year period.

Enterprise Storage and Servers

Enterprise Storage and Servers (ESS) reported revenue of $4.1 billion, up 3% over the prior year period. On a year-over-year basis, industry-standard server revenue increased 6%, with blade revenue growth of 37%. Networked storage revenue grew 5%, led by continued strength in external arrays, where high-end XP revenue grew 19% and revenue in the mid-range EVA line increased 17%. Business critical systems revenue declined 6%, as Integrity systems growth of 76% was offset by declines in PA-RISC and Alpha. Operating profit was $296 million, or 7.2% of revenue, up from a profit of $147 million, or 3.7% of revenue, in the prior year period.

HP Services

HP Services (HPS) revenue increased 1% year-over-year to $3.9 billion. On a year-over-year basis, revenue in Technology Services declined 1%, Consulting and Integration revenue increased 3% and Managed Services revenue grew 9%. Excluding the effects of currency, HPS revenue grew 2% year-over-year. Operating profit was $364 million, or 9.4% of revenue, up from a profit of $256 million, or 6.7% of revenue, in the prior year period.

Software

Software revenue was $318 million, an increase of 30% year-over-year, with revenue in HP OpenView and HP OpenCall increasing 34% and 21%, respectively. Operating profit was $13 million, or 4.1% of revenue, compared with a loss of $37 million in the prior year period. On July 25, HP announced that it had signed a definitive agreement to purchase Mercury Interactive Corp., a leading IT management software and services company, which is expected to close in the fourth calendar quarter of 2006. Once completed, this combination is expected to provide customers with the industry's most robust suite for optimizing, automating and aligning IT services with business needs.

Financial Services

HP Financial Services (HPFS) reported revenue of $519 million, an increase of 6% year-over-year. Financing volume increased 10% over the prior year period, and net portfolio assets grew 4%. Operating profit was $35 million, or 6.7% of revenue, down from a profit of $58 million, or 11.9% of revenue, in the prior year period.

Asset management

Inventory ended the quarter at $7.5 billion, up $696 million sequentially and $820 million year-over-year. Accounts receivable decreased $152 million sequentially and increased $867 million over the prior year period to $9.6 billion. HP's dividend payment of $0.08 per share in the third quarter resulted in cash usage of $222 million. HP utilized $2.3 billion of cash during the third quarter to repurchase approximately 72 million shares of common stock. In addition, HP received approximately 13 million shares of common stock under the company's prepaid variable share purchase program. The Board of Directors of HP also authorized an additional $6 billion for future repurchases of its outstanding shares of common stock. The company intends to offset dilution from the issuance of shares under employee benefit plans, as well as to use the authorization to repurchase shares opportunistically as a means of returning cash to its shareholders. HP exited the quarter with $16.0 billion in gross cash, which includes cash and cash equivalents of $16.0 billion, short-term investments of $14 million, and certain long-term investments of $19 million.

Outlook

HP estimates Q4 FY06 revenue will be approximately $24.1 billion.

Fourth quarter GAAP diluted EPS is expected to be in the range of $0.57 to $0.59, and non-GAAP diluted EPS is expected to be in the range of $0.61 to $0.63. Non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.04 per share, related primarily to the amortization of purchased intangible assets. Fourth quarter GAAP and non-GAAP diluted EPS estimates include $0.03 of stock-based compensation expense.

Full year GAAP diluted EPS expected to be in the range of $2.14 to $2.16, and full year FY06 non-GAAP diluted EPS is expected to be in the range of $2.31 to $2.33. Full year FY06 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.17 per share, related primarily to the amortization of purchased intangible assets. Full year FY06 non-GAAP and GAAP diluted EPS estimates include $0.13 of stock-based compensation expense.

More information on HP's quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP's Investor Relations website at http://www.hp.com/hpinfo/investor/


HP's Q3 FY06 earnings conference call is accessible via an audio webcast at http://www.hp.com/hpinfo/investor/financials/quarters/2006/q3webcast.html.