Annex Bulletin 2007-31                             August 16, 2007

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INDUSTRY TRENDS

Updated 8/16/07, 10:20PM PDT

Analysis of Hewlett-Packard's Third Quarter Results

Profitable Growth Continues

HP Revenues, Earnings Again Beat Expectations; Company Lifts 4Q Outlook

SCOTTSDALE, Aug 16 - HP did it again.  Ever since Mark Hurd took over HP's helm in April 2005, he has been raising the bar of expectations one quarter only to exceed it the next.  And he did it again in the company's third fiscal period.  Excluding one-time charges, the company earned 71 cents per share, five cents higher than the average Street estimate.  Revenues jumped by 16% to $25.4 billion, more than 5% or over $1 billion higher than what analysts had expected.

The "hero of the quarter" was again HP's PC line of business, whose revenues surged by 29% to $8.9 billion.  HP's results are even more impressive when one looks at its PC profit margins.  They were also up, and by quite a bit - from 4% of revenue a year ago, to 5.8% in the latest quarter (see the chart).

[snip]

"We had a strong quarter characterized by our strongest revenue growth since 2000,
share gains in our key businesses, solid expense discipline, operating margin expansion and significant share repurchases," summed up Hurd.  "I am confident that we can continue to execute with discipline and post a strong close to the year."

Yet the relatively small stock increase illustrates just how bearish the stock market mood has become.  Even a company with stellar results, such as HP, only gets meager credit in share prices.

Balanced Growth

The company deserved better than that.  For, all of its lines of business in all geographies grew in the third quarter, and all of them reported improved profitability, too.

[snip]

Imaging & Printing Group's (IPG) revenue grew 8% year over year to $6.8 billion. On a year-over-year basis, supplies revenue was up 9%, commercial hardware revenue grew 6% and consumer hardware revenue rose 10%. Printer unit shipments increased 10%.

[snip]

Ditto re. the smaller and less profitable Enterprise Storage and Servers (ESS) unit.  It reported revenue of $4.5 billion, up 10% from a year ago.  The Intel server revenue increased 16%, with blade soaring by 81%. Storage revenue grew 6%, while tape business declined.  The "business critical" (mostly Unix) server revenue declined 3%.

[snip]

HP Services (HPS) third quarter revenue increased 8% to $4.2 billion.  It is the new quarterly record for this HP business unit, exceeding even last year's 4Q total, traditionally the biggest quarter of the year (see the chart).

[snip]

HP Software's growth was boosted by last year's acquisition of Mercury Interactive.  As a result, its revenue surged by 74% to $554 million. As for the company's pre-Mercury software, the OpenView grew 14% excluding the new acquisition.  

[snip]

Summary: Profitable Growth to Continue?

So HP continued to deliver profitable growth to its shareholder, quarter after quarter, delighting them with upside surprises each time.  How long can this continue, especially in light of the financial credit crunch and jittery investors? One analyst posed a question like that to Mark Hurd.

"The obvious question on everybody's mind is whether you have seen any changes in demand out there related to the recent turmoil in the financial markets?" Richard Gardner of Citigroup asked the HP CEO.

Hurd tried to duck the question by pleading "I am not an economist."

[snip]

Knowing Mark Hurd and seeing his track record in the last 2 1/4 years, we have a feeling he does have a "Plan B" but would rather not talk about it.  Fair enough.

The company's optimistic outlook for the fourth quarter, however, suggests that the "Plan A" (profitable growth) is still something everyone is banking on.

[snip]

"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 Bulletin, along with many tables and charts that back up our forecast.  

Qualified media and friends of Annex may request a TEMPORARY User ID and Password by clicking here and explaining why they wish to have access to this particular Annex Bulletin.  Or call Bob Djurdjevic at 602-824-8111 (cell) to promise not to copy it or otherwise republish it.

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Happy bargain hunting!

Bob Djurdjevic

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