Annex Bulletin 2006-32                                August 16, 2006

Excerpts from CONFIDENTIAL client edition

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Updated 8/18/06, 12:30PM PDT, adds Market update...

Analysis of HP's Third Fiscal Quarter Results

Firing on All Cylinders

Stock Sets New Multi-Year Record in After-hours Trading

SCOTTSDALE, Aug 16 - Hewlett-Packard Corp. is firing on all cylinders.  Revenue was up 5% (6% in constant currency) to $21.9 billion in the company's third fiscal quarter, while net income surged 17-fold to $1.4 billion. (Last year's net numbers was low because of a tax charge that HP took when it repatriated $14.5 billion of foreign earnings in the U.S.).  Operating margin jumped by 2.5 points, and the company also generated $2.6 billion in cash from operations.

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No wonder Wall Street applauded the results that slightly exceeded its expectations, sending initially the HP stock up 4.4% to over $36 in after-hours trading.  The stock had also risen by almost five points in the last five trading days in advance of the latest earnings release.

But what was particularly impressive about this HP quarter was that the results were so balanced.  Revenue growth and profitability improvements were achieved in all geographies and across all of the company's major business segments.  This was the fifth consecutive quarter that HP has beaten Wall Street expectations during Mark Hurd's 16-month tenure as CEO.  

In other words, almost everything Hurd has touched since taking over HP's helm seems to have come out smelling like roses.  "You will see us spend money to lower our cost structure, and and save money to invest in growth," Hurd told the analysts.


Business Segment Analysis

Imaging & Printing Group (IPG).  HP's most profitable unit grew by 5% in the third quarter to $6.2 billion on double digit growth in unit shipments (up 15%).  Operating margins increased from 13% a year ago, to 14.2%.


Personal Systems Group (PSG).  The PC unit was another stellar performer in the current quarter.  Revenues surged by 8% to $6.9 billion, surpassing the company average growth, on a unit shipments increase of 14%.  Operating profit also jumped from 2.6% a year ago, to 4% in the latest period.


Enterprise Storage & Servers (ESS).  HP's enterprise business also increased, albeit at a lower rate that other units (up 3% to $4.1 billion).  But HP's focus on improved profitability paid off.  Despite a relatively slow growth, operating margin almost doubled - from 3.7% a year ago, to 7.2% in the latest quarter.


HP Services (HPS).  HP Services' revenue rose 1% year-over-year to $3.9 billion (up 2% in constant currency).  As with ESS, despite a lower than average revenue growth, this HP unit also showed improved profitability.  HPS' operating margins rose from 6.7% a year ago to 9.4% in the latest period.


Software.  HP software, a perennial money loser in the pre-Hurd era, swung into profits in the fourth quarter of the last fiscal year, and it stayed in the green.  Furthermore, this is now HP's fastest growing business, even before the Mercury acquisition.  In the latest quarter, HP software grew by 30% to $318 million.


Stock Buybacks

Having generated a ton of cash ($2.6 billion cash flow) for its shareholders, the company's Board decided to share some of this wealth with its owners.  Stock buybacks exploded in the latest period to over $2.7 billion, exceeding the previous high-water mark, set in the fourth quarter of 2004.


This amount dwarfs the company's capital expenditures on plant and equipment which amounted to $623 million in the current quarter.


For the current quarter, ending October 31, HP said it would post revenue of $24.1 billion, and operating earnings of 61 cents to 63 cents a share. Analysts had expected revenue of $24.05 billion and operating earnings per share of 59 cents on average. For the full fiscal year, H-P projected operating earnings per share of $2.31 to $2.33, also above analysts' expectations of $2.07.


Either way, HP shares are on an "up, up and away" long-term curve.


"That's all she wrote," we're afraid, for those of you who are NOT Annex Research clients, who are now reading the complete Annex Newsflash, along with all charts which back up our story.

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Happy bargain hunting!

Bob Djurdjevic

Market Update: New Bellwether Stock

SCOTTSDALE, Aug 18 - There were two major IT stories this week.  One was called HP, the other Dell.  They were a study in contrasts.  Each was a very different story.  So the tale of the tape at the end of a turbulent week was: "HP vs. Dell: Up vs. Down."  Take a look at the charts...

Dell's troubles are making the latest HP results look even better by comparison.  And Wall Street traders took notice of it.

What about that third company, Big Blue?  The ebullience that strong HP quarterly results generated in the marketplace also helped IBM (and even Dell, too, before today).  

So Big Blue shares are also up about 5% for the week, while the company's stock is threading its way between HP and Dell.  And even Dell is slowly trending back up, after the initial disappointment that drove the stock down.

So meet the new IT "bellwether stock" -- HP!

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Volume XXII, Annex Newsflash 2006-32
August 16, 2006

Bob Djurdjevic, Editor
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