HP: 'Firing on All Cylinders'
On a day of volatile stock market swings fueled by worries over housing, credit, and the economy, investors longed for even scraps of good news Aug. 16. Hewlett-Packard (HPQ) didn't disappoint.
The computer maker said fiscal third-quarter profit jumped 29% to $1.8 billion as sales increased 16% to $25.4 billion. Revenue exceeded analysts' expectations by more than $1 billion. News like that was welcome at the end of a session that saw the Dow Jones industrial average plummet as much as 343 points only to regain territory by the end of the day. After shedding 10¢ in regular trading, HP shares rose about 1% to $46.49 in extended trading.
Laptop and International Sales Shine
Driving HP's gains were sales of personal computers, which surged 29%, accounting for $8.9 billion, or 35% of the total. HP, under Chief Executive Mark Hurd, is grabbing market share from Dell (DELL) and widening its lead as the world's top PC maker. Notebook sales led the PC division, with year-on-year growth of 54%, vs. 12% for desktops. PC growth substantially outpaced other areas, such as printers, which saw sales growth of 8%. Services revenue matched printer sales growth, while servers ticked up 10%.
HP's international business accounted for 65% of sales, with much growth coming from sales in Brazil, Russia, India, and China, which together grew 35%, while sales in the Asia Pacific region grew 22%.
Analysts were especially pleased with HP's forecast for the current quarter. HP expects sales of $27 billion to $27.2 billion, compared with analysts' expectations of $26.46 billion. HP forecast per-share earnings of 80¢ to 81¢, exceeding 78¢ expected by analysts.
Morningstar (MORN) analyst Rick Hanna describes HP as "firing on all cylinders," saying his one concern was with HP's software group, where revenue hit $554 million, or 2% of sales. The 74% surge was mostly due to HP's $4.5 billion acquisition of Mercury Interactive in 2006. "Without Mercury's results that unit would have been flat, and that's an area that IBM (IBM) has been focusing on aggressively," Hanna says.
HP also has tried to beef up software through its $1.6 billion purchase of Opsware (see BusinessWeek.com, 7/24/07, "Hewlett-Packard Opts for Opsware"). Before that, HP spent $214 million on Neoware. Gartner (IT) analyst Carl Claunch says the growth-by-acquisition strategy is "relatively riskier" than in the other parts of its business. "Acquisitions can sometimes cause problems," he says. "But we're not seeing any problems yet."
Currently in Demand
Nor is HP seeing problems related to fallout from the housing and stock market malaise. During a conference call, analysts quizzed Hurd about demand heading into the third quarter, especially following warnings by retailer Wal-Mart (WMT) about a stagnating retail sales environment for the second half (see BusinessWeek.com, 8/15/07, "The Implications of Wal-Mart's Warning"). Hurd initially said he had "no data to indicate any material change in demand in any segment or any market."
But later, when asked about rising inventory levels with distributors—the so-called channel inventory of unsold goods rose $782 million to $8 billion from the first quarter—Hurd painted a picture of healthy demand. "We're very comfortable with our channel inventory levels," Hurd said, explaining that much of the increase was due to an expected gain in demand for the back-to-school season, and to a higher-than-usual amount of printer supplies in the distribution channel. "That's something you usually want," Hurd said. American Technology Research analyst Shaw Wu said he wasn't "bothered" by the inventory levels, given HP's forecast for the third quarter and because the company had a "favorable pricing environment on components, and so that's the time when you stock up."
As upbeat as HP's numbers were, Chief Financial Officer Cathie Lesjak cautioned that the company may not continue to outpace the industry's growth rate. According to researcher IDC, worldwide PC shipments rose 12.5% in the second quarter. "We do not believe it is prudent to set investor expectations that our [PC] business can continue to grow" at the current pace, Lesjak said. "Nor do we think it appropriate to build a cost structure on that basis."