HP's Q1 strong; business servers, less so
February 23, 2007
HP put together a rousing first quarter for its fiscal 2007, with big gains in profits and revenues for the company overall. When you post a 26 percent increase in earnings, investors notice. But the report kicked the HP share price downward. Stock analysts remain concerned about the source for HP's future growth. Today the stock closed just under $41 a share, managing to eke about a $40 price after the Q1 figures.
This quarter's gains came from the surging PC and printer business, two operations that show vastly different profit margins. PCs return about 4 percent, while the printers and imaging products come in at 15 percent.
HP reported that a large measure of its profits appeared because of HP's continued cost-cutting. Revenue grew 11 percent overall for the company, but the numbers for the Business Critical Systems, where the Integrity server business lives, were down. CEO Mark Hurd said the company just missed the mark on selling and closing deals for Integrity servers running HP-UX and Windows.
Integrity is the target platform HP is urging its migrating 3000 customers onto. A good friend of mine at a reseller reports that the new Integrity business, where HP is attracting new customers, is mostly Windows-related. HP-UX Integrity purchases come from the installed base, by his anecdotal accounts.
Enterprise Storage and Servers and HP's Services business — the two arms that sell to the HP 3000 customer — posted the smallest revenue growth of any HP segment. Business Critical Servers showed a 6 percent decline in revenues. ESS grew just 5 percent, the same at HP Services.
HP announced that Integrity servers now make up 55 percent of all BCS system revenues, and that these Itanium2-powered servers saw growth of 75 percent from the 2006 first quarter.
As an example of the continued cost cuts, HP announced plans to freeze its pension plan for US employees. In July it will reduce eligibility for its subsidized retiree medical program. Once again, HP will offer an early-retirement program, called EER, which it expects to be accepted by about 3,000 employees.
Last time around, some very senior HP 3000 manpower took an exit with their EER benefits. Employees who don't take early retirement can benefit from an increased company contribution to their 401(k) plans.
Enterprise storage and servers, overall, posted revenue gains of 5 percent. PCs and printers had their usual improving quarters. Industry-standard servers — those powered by Xeons and running Windows — showed strong results, too.
If you're so inclined, you can listen to HP's press conference with market analysts at the company's Web site. We'd recommend some skipping of the first half hour; the interesting part began with analysts' questions. The gateway for the recorded press conference is at HP's Investor site, and the Webcast runs best under Windows.
The words deserve the music of graphics, too. The Q1 PowerPoint slides are in a PDF file.