HP earnings confound forecasts

Hewlett-Packard edged ahead of analyst expectations in the fourth quarter, with PC and printer sales driving net income and revenue higher.

The Palo Alto, California-based company on Wednesday reported net profits of $862m for the final fiscal quarter of 2003, ended 31 October, compared with $390m in the year-ago period. Revenues increased 10 per cent from $18bn to $19.9bn.

HP reported earnings of 36 cents per share, excluding some items. Analysts surveyed by First Call had expected earnings of 35 cents per share.

CEO Carly Fiorina was jubilant, a contrast to her more subdued tone three months ago, when HP missed expectations.

"This was a great quarter. By any measure, we hit our stride and demonstrated what the merger was all about," Fiorina said on Wednesday in a statement.

Overall, HP's strong revenue performance was diminished by the fact that much of it came from products that have low profit margins, CFO Bob Wayman said in a conference call.

HP's imaging and printing division had revenue of $6.2bn, an 11 per cent increase, with operating profit of $1bn.

HP is pushing ahead with its printer division, announcing new products and a partnership this week to expand into the high-end copier market. It faces an attack by rival Dell, which sold more than 1 million printers since it started its programme in March but HP counters that it sells 40 million printers each quarter.

The company met two goals for the quarter: profitability in its personal systems division, which includes PCs and handheld computers; and profitability in its enterprise system division, which includes servers and storage systems.

The personal systems division reported revenue of $6bn, a 19 per cent increase, with operating profit of $21m. Enterprise systems had revenue of $4.1bn, a 2 per cent increase, with an operating profit of $106m.

"Our plans call for them to profitable each quarter" of fiscal 2004, Wayman said of the enterprise and personal systems divisions.

Revenue from the business-critical system group, which sells higher-end servers, dropped 9 per cent. However, the company shipped 17 per cent more of its top-end Superdome servers than in the year-earlier quarter, the most ever.

HP shipped 35 per cent more PCs compared with the year-earlier quarter, the company said. Specifically, laptop PCs shipments increased 53 per cent and desktop PCs shipments increased 23 per cent.

But more work is needed in the segment, executives said. For example, HP still wants to sell more products directly to customers rather than through sales channels that sap profit margins.

"Where we go direct, average selling price is noticeably higher than where we go through the channel. This is one of the advantages the Dell model has," Wayman said. "That's something we need to move on going forward."

Services revenue grew 5 per cent to $3.2bn, with operating profit of $393m.

For the current first quarter, which ends in February, the company projects revenue of $19.1bn to $19.5bn, ahead of analyst expectations of $19bn.

HP also said it's comfortable with analysts' fiscal year 2004 projections of earnings of $1.42 per share.

The company laid off 2,400 people but that was more than offset by an addition of 4,400 others, Wayman said. New hires were primarily in HP's managed services business and overseas operations, he said, bringing the total employee count to 141,800.

Layoffs mainly hit HP's enterprise systems group, Wayman said, and to a lesser degree, its personal systems and services. In the enterprise group, some layoffs were the result of convergence in the company's server lines, which is reducing how much money the company has to invest in future products.

In other news from the company:

• In the fiscal year, HP spent $600m on branding and advertising, $400m on internal information technology and $275m on employee training. Training will increase to about $310m in the current fiscal year.

• The company's handheld business was profitable in the quarter.

• The company shipped more than a million digital cameras in the quarter, double what it shipped in the year-earlier position and a new record.

• HP has sold more than 50,000 'blade' servers so far, thin and lower-end systems that share a common chassis.

Stephen Shankland writes for CNET News.com.