Surge in laptop sales drives HP results

Surge in laptop sales drives HP results

HP's biggest growth came from its software and services divisions

A 31 percent jump in laptop PC sales helped drive Hewlett-Packard's strong quarterly results this week, although there were signs of growth in all its businesses.

Total revenue for the second quarter was US$28.3 billion, up 11 percent from a year earlier. Net income was US$2.06 billion, up from $1.78 billion in the same quarter a year ago, the company said.

HP announced preliminary financial results last week, when it also revealed plans to buy IT services company Electronic Data Systems for US$13.9 billion. It delayed the full results, including details of how the various segments performed, until Tuesday.

HP's biggest growth came from its software and services divisions, although they started from a smaller base. Services revenue increased 12 percent from the same quarter last year to US$4.6 billion. Software revenue jumped 28 percent to $727 million, HP said.

The Personal Systems Group is HP's biggest division. Revenue there grew 16 percent from a year earlier to US$10.1 billion, with unit sales up 21 percent, the company said. The growth came almost all from laptop sales, which climbed 31 percent. Desktop PC sales were flat.

In a conference call after the results were released, CEO Mark Hurd said the EDS acquisition will allow HP to capture a significantly bigger portion of what businesses spend on IT.

"We expect the acquisition to accelerate our reach into key enterprise accounts," he said. "HP is great at engineering and customer support, but we have a coverage problem. We expect the EDS acquisition to double our share of the enterprise wallet and create a platform for opportunities for new business growth," he said.

He said the combination of software and services will become increasingly important for HP and the industry.

"The alignment of software and services is a really strategic thing for us in the context of automating (business) processes," he said. "EDS is the biggest applications outsourcer in the world, the biggest applications testing company in the world. You'll continue to see more and more alignment of software and services in the evolution of the services industry."

Hurd pledged to cut costs at the combined company, which, among other things, will probably mean job cuts. "Make no mistake, we will get the cost out. We will create value for our shareholders," he said.

Hurd said 70 percent of HP's second-quarter revenue came from outside the US. "We benefited from robust demand in emerging economies," he said. Revenue from four key emerging markets -- Brazil, Russia, China and India -- grew 26 percent combined and accounted for 10 percent of overall revenue.

Revenue growth in the Americas was weak, at just 4 percent, but that was offset by growth of 16 percent in both the Asia-Pacific region and Europe, the Middle East and Africa. Europe accounted for 42 percent of HP's revenue, Hurd said. The US saw little or no growth. "Spotty would be the best way to describe it," with growth in a few areas but not others, Hurd said.

The quarter's results were driven by cost savings, additional sales staff that HP has put in the channel and HP's broad product portfolio, Hurd said.

In other divisions, HP's Imaging and Printing Group reported revenue of US$7.6 billion, up 6 percent from the prior year. Revenue from the Enterprise Storage and Servers division climbed 4 percent to $4.8 billion. Storage revenue climbed 14 percent and revenue from blade servers grew 68 percent, HP said. Revenue from industry standard servers was flat, but revenue from high-end servers grew 21 percent and mid-range server revenue grew 17 percent, HP said.

The industry standard server group didn't grow partly because HP had strong growth last year, which made for a tough comparison, but also because HP failed to close a few deals in the last quarter, which was "an execution problem," Hurd said. He said it wasn't due to the growth in server virtualization, which would be more likely to benefit standard server sales.

As reported last week, earnings per share for the quarter, excluding one-time items, was $0.87, up from $0.70 last year and ahead of the consensus analyst estimate of $0.85, according to Thomson Financial. HP raised its revenue outlook for the fiscal year by about a half-billion dollars, to between US$114.2 billion and 114.4 billion, and its earnings per share forecast by $0.04, to between $3.30 and $3.34 per share.

The EDS deal is designed to help HP compete head-on in the global IT services market with IBM, which is currently the leader in services and drives much of its profit from that business.

In particular, analysts say, EDS will give HP a much bigger business in IT outsourcing and in the kind of strategic IT consulting services aimed at business executives. As with most big mergers, there will be significant risk involved in combining the companies' operations and defining a joint strategy.

The deal has been approved by both companies' boards and is expected to close in the second half of the year.

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