HP Q4 revenue up, profits fall on layoff charges

It raised the number of employees let go in a restructuring plan to 15,300

Hewlett-Packard Co. today reported that its fourth-quarter revenue rose on strong growth in PC and server shipments, but it said restructuring charges and a decline in revenue from consumer printers hurt its profitability for the quarter.

"[The results] reflect good execution across our businesses, with solid revenue growth, good cost control and margin expansion in many key areas," said CEO Mark Hurd, on a conference call with reporters after the release of HP's earnings.

Revenue was $22.9 billion, up 7% from revenue of $21.4 billion in last year's fourth quarter and ahead of analyst estimates of $22.8 billion compiled by Thomson First Call. Revenue from storage and servers was up 10%, while revenue from the company's PC group was up 9%.

HP's fourth-quarter net income, under generally accepted accounting principles (GAAP), was $416 million, down 62% from net income of $1.1 billion in the same period last year. The net income posted reflects $1.1 billion in charges related to a broad restructuring program put in place by HP management in July and other factors. Excluding those charges, net income for the quarter, which ended Oct. 31, was $1.5 billion. That compares with net income, excluding charges, of $1.2 billion in the same period last year.

HP has increased the number of layoffs it announced as part of its restructuring plan to 15,300, said Bob Wayman, HP's chief financial officer. The company had originally expected to cut 14,500 jobs but saw the need for additional layoffs as it proceeded with its plan.

The majority of the cost savings that HP cited as the catalyst for the layoffs won't kick in until the company's next fiscal year, as all of the affected employees leave the company, Wayman said.

On the product side, the Enterprise Storage and Servers (ESS) group was led by a 12% increase in revenue generated by HP's servers based on Intel Corp.'s Xeon processors and Advanced Micro Devices Inc.'s Opteron processors. Blade server revenue was up 65%, while revenue from HP's Integrity servers was up 70%, Hurd said. The Palo Alto, Calif.-based company's storage business also improved, posting 17% growth in revenue.

Overall, the ESS group recorded $4.5 billion in revenue and an operating profit of $405 million. The profitability of the group has swayed back and forth in recent years, but for this quarter, operating profit was up from $100 million last year.

HP's PC group was led by the performance of its notebook products, which produced a 23% improvement in revenue over the past year. Desktop revenue increased by only 1%. The entire group recorded revenue of $7.1 billion and an operating profit of $200 million, up sharply from the $77 million in operating profit posted in the same period last year.

As he did several times this year, Hurd made a point of emphasizing HP's commitment to the PC business. Some financial analysts have called for HP to exit the PC business to focus on its enterprise businesses, but Hurd is standing firm as he finishes his second quarter with the company.

"This business is core to HP, and it's satisfying to see that steady improvements have been achieved over each of the past four years," Hurd said.

The results were less stellar for the company's imaging and printing business, which generates the most profit of any HP division. The division's profits fell during the fourth quarter, from $1.1 billion in the same period last year to $896 million. Revenue was $6.8 billion, up 4% from last year.

Hurd blamed the shifting mix of HP's printer business as one reason for the profit shortfall as well as the decline in revenue from HP's printers for consumers. The company sold more low-cost printers during the quarter, which are less profitable than higher-end systems, he said. However, HP has begun to concentrate more on the high-end market in recent quarters, and color laser and multifunction printers helped shipments of commercial printers rise 16% during the quarter.

HP took in $3.8 billion from its services business, a 6% improvement. And its software business posted a profit for the first time, earning $27 million on sales of $311 million.

For the full year, HP recorded revenue of $86.7 billion and GAAP net income of $2.4 billion. The company predicts first-quarter 2006 revenue of between $22.3 billion and $22.6 billion, noting that revenue generally falls from the fourth quarter to the first quarter due to seasonal purchasing patterns. For all of 2006, HP should generate revenue of $89.5 billion to $91 billion, which would be a 6% increase over this year's revenue, Wayman said.

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