February 15, 2006 1:22 PM PST

HP revenue up despite fall in services revenue

Hewlett-Packard's first-quarter revenue and earnings per share came in ahead of expecations, but revenue from its services business fell slightly.

Total revenue for the quarter, which ended Jan. 31, was $22.7 billion, up 6 percent from $21.5 billion in revenue during last year's first quarter. Analysts polled by Thomson First Call had expected the company to record $22.5 billion in revenue.

Earnings per share, excluding a one-time expense from the amortization of purchased assets, were 48 cents, ahead of Thomson's expectations of 44 cents. Net income was $1.2 billion, or 42 cents, in accordance with generally accepted accounting principles (GAAP).

Analysts and corporations often exclude one-time charges or benefits that normally get counted in the GAAP results in order to provide what they think is a better model of the company's performance.

"This was an important quarter for HP," CEO Mark Hurd said on a conference call following the company's results announcement. "We made progress toward creating a stronger company that better serves its customers."

Hurd's mantra since arriving at HP last April has been to decrease the company's cost structure, a theme he referred to frequently Wednesday. The company's $1.2 billion in overall profit was up 30 percent from the $900 million profit it recorded last year.

Revenue from HP's services group fell in part due to the effects of changes in exchange rates between foreign currencies, but also because HP is focusing on winning profitable services contracts, not just services contracts at any cost, he said.

"This was a group with profitability issues," Hurd said, referring to the services business. "But we need growth with deals we can deliver, and deals we can deliver in which we make money," he said.

Revenue rose 8 percent in both HP's PC group and its printer group. The server organization recorded a five percent jump in revenue.

The PC group posted one of its best operating margins in years, Hurd said, although that high-water mark is only 3.9 percent. Still, its operating margin improved from 2.1 percent in last year's first-quarter as notebook revenue grew 26 percent and HP focused on profitable segments of the market, he said.

A shift to Advanced Micro Devices' lower-cost notebook processors also helped HP improve its margins. In the fourth calendar-quarter of 2005, which overlaps HP's first fiscal quarter, AMD's chips made up 57.9 percent of all HP notebooks sold in U.S. retail stores, up from 30 percent in the same period in 2004, according to data from Current Analysis. HP's overall PC shipments to the U.S. retail market grew 30.5 percent, said Sam Bhavnani, senior analyst with Current Analysis.

The imaging and printing group remained HP's most profitable group by a large margin during the quarter, with a $973 million operating profit. This was down a bit as a percentage of that group's revenue compared with last year, but HP is refocusing the group on certain markets that will eventually yield more revenue from supplies, Hurd said. There's very little profit in printer hardware by itself, but sales of ink cartridges and special paper are very profitable. HP's revenue from printer supplies rose 11 percent during the quarter.

The operating profit of HP's server group rose strongly from $69 million last year to $326 million this year. Revenue from servers based on Intel and AMD's chips rose 6 percent, while revenue from networked storage grew four percent.

HP's software group recorded the best increase in revenue of any company division, with a 29 percent increase in overall revenue fueled by a 34 percent increase in revenue from OpenView, HP's enterprise management software. The group also swung to a profit in the first quarter from a loss in last year's first quarter.

Looking forward to the second quarter, HP expects revenue to be flat to slightly down compared with the first quarter, said Bob Wayman, HP's chief financial officer. This is consistent with normal seasonal patterns, as the second quarter is a slow period for PC and server sales.

HP has cut about 6,500 employees from the 14,500 total layoffs it announced last July, Wayman said. The company will continue to pare down its workforce amid the renewed emphasis on profitability, he said.

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