November 16, 2006 4:24 PM PST

HP's fourth-quarter profits surge

Hewlett-Packard posted fourth-quarter financial results Thursday that capped off a year of dramatic improvements in profitability, led by solid quarters from just about every business unit.

HP said net income for its fiscal fourth quarter, ended October 31, rose to $1.7 billion, or 60 cents per share, up from $416 million, or 14 cents per share, in the same period last year. Revenue climbed 7 percent to $24.6 billion. The company took a massive charge in last year's fourth quarter to pay for the layoffs of more than 15,000 employees.

Not counting some additional restructuring costs, earnings per share were 68 cents, above estimates of analysts polled by Reuters Estimates and Thomson First Call. For the full year, HP recorded a profit of $6.2 billion, a 158 percent increase over last year's $2.4 billion in net income. Revenue was $91.7 billion, up about 6 percent, compared with $86.7 billion last year. Earnings per share were $2.18, a 166 percent increase over last year's 82 cents per share.

"This is our most balanced performance in recent memory," said HP CEO Mark Hurd on a conference call with reporters following the release of the numbers. The company enjoyed solid performances from its businesses both by operating segment and by geography, he said.

HP's PC business continued to improve its operating margins during its fourth quarter. Operating profit for the group was $336 million, up from $200 million a year ago. Revenue increased 10 percent compared with last year led by notebook revenue, which was up 24 percent.

Revenue from consumer PC purchases was up 19 percent, while commercial growth was just 4 percent, in line with broader industry trends seen throughout the year. HP regained the top spot in the PC market during the quarter, on the strength of the consumer-focused back-to-school shopping season. Dell, the previous leader, is more dependent on revenue from corporate PC purchases than HP.

That also means that HP usually has an advantage over its rival heading into the end-of-year holiday shopping season. Right now, Hurd said he wasn't completely sure what to expect from the upcoming season, given the lack of Microsoft's Windows Vista operating system, but he said that the company otherwise expects a normal holiday period.

The company's imaging and printing group traditionally forms the basis of HP's profits, and the fourth quarter was no exception. Imaging and printing profit accounted for about two-thirds of the overall company's total at $1.1 billion, up from $896 million last year, while revenue grew 7 percent to $7.3 billion.

On the enterprise technology side, the company's enterprise storage and servers group posted a 4 percent increase in revenue to $4.7 billion. Profits were $502 million, up 24 percent, compared with $404 million a year ago. Revenue from servers based on Intel and Advanced Micro Devices' x86 processors was up 9 percent, but networked storage revenue grew just 1 percent.

HP's software business will look very different in upcoming quarters, as it folds in products from Mercury Interactive, which it officially acquired last week. Mercury will operate as a wholly owned subsidiary until early 2007, Hurd told financial analysts on a separate conference call. A product road map should be coming in 90 days or so, with merged products expected by February, he said.

HP's revenue gains may appear tepid, but that's the consequence of reaching $90 billion in annual revenue, Hurd said. Instead, profit gains have been Hurd's mantra since he took over last year; though 15,300 people had to lose their jobs to achieve it, HP's profit margin is greatly improved from a year ago. The company has "substantially" completed the layoffs announced last year, Hurd said.

Despite the gain in profits, Hurd said the company still has more work to do in eliminating costs from ongoing activities, not just settling for the one-time gains from the layoffs. "We've got to do better than this," he said, though he noted that he was pleased with the company's performance this year.

In response to questions, Hurd briefly addressed the boardroom spying scandal that cost Patricia Dunn her post as chairman of HP's board of directors, in addition to the resignations of General Counsel Ann Baskins and another top lawyer at the company. He had no news about the vacancies on HP's board following the resignation of Dunn, George Keyworth and Tom Perkins, but said, "We're trying to get HP the best board we possibly can and the best board on the planet."

He also did not provide an update on the company's internal investigation into the matter, but said HP will eventually share some of what it had learned with the public.

"I'm trying to not only understand exactly what happened, but how we're going to lead in this area going forward," Hurd said.

Dell had been expected to report earnings on Thursday as well, but delayed its earnings because of an ongoing SEC investigation into its accounting practices.

Reuters contributed to this report.

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Mark Hurd, Mercury Interactive Corp., net income, profit, layoff

 

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