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A SPECIAL ANNEX NEWSFLASH

Analysis of Hewlett Packard First Quarter Business Results

Still No Cigar

Managed Services Surges by 27%, But Profit Margin Drops

PHOENIX, Feb 20 - Hewlett Packard (HP) is closer to attracting rapt Wall Street's attention, but is still getting no cigar for admiration.  The company reported last night a 30% increase in its first quarter profit on a 9% revenue gain, yet its stock tumbled more than 3% following the release of the quarterly results (see the chart below).  Go figure...

The ostensible reason for the decline was that HP competitors, most notably IBM, had exceeded the Wall Street analyst expectations.  Actually, the only thing excessive about the last IBM earnings report was that Big Blue's hype exceeded its results (see "IBM: Hype Exceeds Results", Jan 15).

Evidently, HP hasn't learned from the IBM example.  It isn't hyping up its results.  Instead, Carly Fiorina, HP's CEO, was being more matter-of-fact during the teleconference that followed the earnings release.  She sounded cautious as she said that she expected "a steady recovery in IT spending, not an explosive one."

Now, contrast that with the bullish comments on the same topic offered by the IBM CFO, following the release of Big Blue's fourth quarter earnings last month:

“We feel the environment is steadily improving,” IBM CFO, John Joyce, echoed his boss’s optimism during the teleconference with analysts.  He also (uncharacteristically) offered a bold forecast: “I would characterize 2004 as the year as the year when the industry will begin its next growth cycle.”  

(see  "IBM: Hype Exceeds Results", Jan 15)

Meanwhile, HP delivered probably the most balanced performance among its lines of business since the Compaq merger.  Here are some highlights:

  • Personal Systems grew revenue in both desktops and notebooks almost twice as fast as Dell for the second quarter in a row.  HP said that its PC unit achieved the No. 1 market share position worldwide (revenue up 20%), and generated record profits.
  • Enterprise Systems also showed revenue growth (5%) and improved profitability by $190 million from last year.
  • Imaging and Printing reported record first quarter revenue and operating profit, reflecting strong HP presence in consumer markets. HP shipped 14 million hardware units in the quarter, an increase of 12% over the prior year.
  • HP Services grew 6% year-over-year, with managed services leading the way with a 27% year-over-year growth. But the operating margin slipped from 11.4% the year before to 8.2%.

Some analysts used the preceding as an excuse for panning the HP stock.  

"The weakness in services is a cloud," said Mark Stahlman, an analyst for Caris & Company, who was quoted in today's New York Times article about the HP results. "The rest of the services sector isn't having the same problem."

Hm... Wonder what industry this analyst is following?

Take EDS, for example, the second largest global IT services competitor.  Its gross margin has been lower than HPS' operating margin (see the chart below).

Or how about CSC, which reported its latest quarterly results last week?  Its operating margin was about 5%, well below HPS'.

Oh well, trying to make reason and facts prevail on Wall Street has always been an uphill battle.  It still is.  For, Wall Street trades on perceptions, not facts... never more so than now.  Which means that managing expectations has become a more important challenge for the CEOs than managing businesses.

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2004 HP: "Still No Cigar" (Feb 2004); "Nokia Dials HP!" (Feb 2004)

2004 other stories: "Good Quarter Gets Boos" (Feb 2004); "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); "Cronyism Is Alive and Well at EDS" (Jan 2004); "China Now Bigger Than U.S.!" (Jan 26); "IT Industry: Whither Goeth It?" (Jan 26); "IBM: Hype Exceeds Results" (Jan 15); "Five Most and Least Likely Forecasts for 2004" (Jan 2004);

2003 HP: "IBM vs. HP: And the Winner Is..." (Nov 2003); "Strong Finish Not Enough" (Nov 2003) "An HP Hat Trick (March 2003);   EXCERPTS - Analysis of Hewlett Packard Services FY02 results (May 2003);  2003 Global IT Services Heptathlon (May 23, 2003)Analysis of “Top 10” IT Leaders’ Market and Business (June 2003)

2003 IBM: "Small Is Now Big at Big Blue" (Oct 15); "A Passage to India" (July 22),  “On the Nose But No Cigar” (July 16), “A Paler Shade of Blue” (June 2), “Save, Spend and Split” (May 8), “Shrunk by the Marketplace” (Apr 17), “Turnaround Continues...” (Apr 15), “Start of a Real Turnaround?” (Jan 17).

2002 IGS: "Half or Double Trouble?" (Aug. 12, 2002), "IBM to Take $500M Charge" (Sep 3, 2002), IBM-PwCC Update (Oct 2, 2002), Analysis of IBM Second Quarter Results (July 17, 2002), IBM Layoffs Confirmed! (Aug 14, 2002), Analysis of IBM Third Quarter Results (Oct 16, 2002), Boom Amid Gloom and Doom (Oct 10, 2002)

Or just click on and use "financial engineering" or similar  keywords.

Volume XX, Annex Newsflash 2004-04
February 20, 2004

Bob Djurdjevic, Editor
(c) Copyright 2004 by Annex Research, Inc. All rights reserved.
e-mail: annex@djurdjevic.com

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