HP Q4 revenue up, profits fall on layoff charges

Hewlett-Packard's fourth-quarter revenue rose on strong growth in PC and server shipments, but restructuring charges and a decline in revenue from consumer printers hurt its profitability for the quarter.

"[The results] reflect good execution across our businesses, with solid revenue growth, good cost control and margin expansion in many key areas," said Chief Executive Officer Mark Hurd, on a conference call with reporters after the release of HP's earnings.

Revenue was US$22.9 billion, up 7 percent from revenue of US$21.4 billion in last year's fourth quarter and ahead of analyst estimates of US$22.8 billion compiled by Thomson First Call. Revenue from storage and servers was up 10 percent, while revenue from the company's PC group was up 9 percent.

According to generally accepted accounting principles (GAAP), HP's fourth-quarter net income was US$416 million, down 62 percent from net income of US$1.1 billion last year. This quarter's net income includes the effect of US$1.1 billion in charges related to a broad restructuring program put in place by HP management in July and other factors. Excluding those charges, net income for the quarter, which ended Oct. 31, was US$1.5 billion, compared to net income excluding charges of US$1.2 billion last year.

HP has increased the number of layoffs enacted during that plan to 15,300, said Bob Wayman, HP's chief financial officer, on a later conference call with financial analysts. The company had originally expected to cut 14,500 jobs, but saw the need for additional layoffs as it proceeded with its plan, Hurd said.

The majority of the cost savings that HP cited as the catalyst for the layoffs will not kick in until the company's next fiscal year as all of the affected employees leave the company, Wayman said.

On the product side, the Enterprise Storage and Servers (ESS) group was led by a 12 percent increase in revenue generated by HP's servers based on Intel Corp.'s Xeon processors and Advanced Micro Devices Inc.'s Opteron processors. Blade server revenue was up 65 percent, while revenue from HP's Integrity servers was up 70 percent, Hurd said. The company's storage business also improved, posting 17 percent growth in revenue.

Overall, the ESS group recorded US$4.5 billion in revenue and an operating profit of US$405 million. The profitability of this group has swayed back and forth in recent years, but this quarter operating profit was up from US$100 million last year.

HP's PC group was led by the performance of its notebook products, which produced a 23 percent improvement in revenue over last year. Desktop revenue increased by only 1 percent. The entire group recorded revenue of US$7.1 billion and an operating profit of US$200 million, up sharply from the US$77 million in operating profit posted last year.

As he did several times this year, Hurd made a point of emphasizing HP's commitment to the PC business. Some financial analysts have called for HP to exit the PC business to focus on its enterprise businesses, but Hurd is standing firm as he finishes his second quarter with the company.

"This business is core to HP and it's satisfying to see that steady improvements have been achieved over each of the past four years," Hurd said.

The results were less stellar for the company's imaging and printing business, which generates the most profit of any HP division. However, that profit fell during the fourth quarter, from US$1.1 billion last year to US$896 million during this year's fourth quarter. Revenue was US$6.8 billion, up 4 percent from last year.

Hurd blamed the shifting mix of HP's printer business as one reason for the profit shortfall as well as the decline in revenue from HP's printers for consumers. The company sold more low-cost printers during the quarter, which are less profitable than higher-end systems, he said. However, HP has begun to concentrate more on the high-end market in recent quarters, and color laser and multifunction printers helped shipments of commercial printers rise 16 percent during the quarter.

HP took in US$3.8 billion from its services business, a 6 percent improvement. And its software business posted a profit for the first time, earning US$27 million on sales of US$311 million.

For the full year, HP recorded revenue of US$86.7 billion and GAAP net income of US$2.4 billion. The company predicts first-quarter 2006 revenue of between US$22.3 billion and US$22.6 billion, noting that revenue generally falls from the fourth quarter to the first due to seasonal purchasing patterns. For all of 2006, HP should generate revenue of US$89.5 billion to US$91 billion, which would be a 6 percent increase over this year's revenue, Wayman said.

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Tom Krazit

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