HP Reports Fourth Quarter 2006 Results

PALO ALTO, Calif.—(BUSINESS WIRE)—November 16, 2006— HP (NYSE: HPQ) (Nasdaq: HPQ) today announced financial results for its fourth fiscal quarter ended Oct. 31, 2006, with net revenue of $24.6 billion, representing growth of 7% year-over-year, or 6% when adjusted for the effects of currency.

GAAP operating profit was $1.9 billion and GAAP diluted earnings per share (EPS) was $0.60 per share, up from $0.14 in the prior year period. Non-GAAP operating profit was $2.2 billion, with non-GAAP diluted EPS of $0.68, up from $0.51 in the prior year period. Non-GAAP financial information excludes $208 million of adjustments on an after-tax basis, or $0.07 per diluted share, related primarily to restructuring-related costs and amortization of purchased intangibles. GAAP and non-GAAP financial information include stock-based compensation expense in the current financial period only.

"We closed a strong year with solid revenue growth, margin expansion across our key businesses and excellent cash flow from operations," said Mark Hurd, HP chairman and chief executive officer. "We are well on our way to building a more competitive HP that creates further value for our shareholders."
                      Q4 FY06 Q4 FY05   Y/Y    FY06    FY05     Y/Y

Net revenue ($B)      $ 24.6  $ 22.9       7% $ 91.7  $ 86.7        6%
GAAP operating margin    7.7%    1.0% 6.7 pts    7.2%    4.0%  3.2 pts
GAAP net income ($B)  $  1.7  $  0.4     308% $  6.2  $  2.4      158%
GAAP diluted EPS      $ 0.60  $ 0.14     329% $ 2.18  $ 0.82      166%
Non-GAAP operating
 margin                  9.0%    7.6% 1.4 pts    8.0%    6.4%  1.6 pts
Non-GAAP net income
 ($B)                 $  1.9  $  1.5      27% $  6.8  $  4.7       44%
Non-GAAP diluted EPS  $ 0.68  $ 0.51      33% $ 2.38  $ 1.62       47%


Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below.

During the quarter, on a year-over-year basis, revenue in the Americas grew 8% to $10.8 billion, revenue in Europe, the Middle East and Africa grew 7% to $9.7 billion, and revenue in Asia Pacific grew 6% to $4.0 billion. When adjusted for the effects of currency, revenue in the Americas grew 7%, revenue in Europe, the Middle East and Africa grew 3%, and revenue in Asia Pacific grew 7%.

Personal Systems Group

Personal Systems Group (PSG) revenue grew 10% year-over-year to $7.8 billion, with unit shipments up 16%. On a year-over-year basis, notebook revenue grew 24% while desktop revenue was flat. Commercial client revenue grew 4% year-over-year, while Consumer client revenue increased 19%. Operating profit was $336 million, or 4.3% of revenue, up from a profit of $200 million, or 2.8% of revenue, in the prior year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue grew 7% year-over-year to $7.3 billion. On a year-over-year basis, supplies revenue grew 9%, commercial hardware revenue grew 8% and consumer hardware revenue grew 2%. Printer unit shipments increased 17% year-over-year, with consumer printer hardware units up 16% and commercial printer hardware units up 20%. Momentum in key growth initiatives continued, with all-in-one unit shipments up 22% year-over-year, appliance photo printers up 70%, color laser printer shipments up 40% and printer-based MFP shipments up 160%. HP Indigo Press printed page volume grew 41% over the prior year period. Operating profit was $1.1 billion, or 14.8% of revenue, up from a profit of $896 million, or 13.2% of revenue, in the prior year period.

Enterprise Storage and Servers

Enterprise Storage and Servers (ESS) reported revenue of $4.7 billion, up 4% over the prior year period. On a year-over-year basis, industry-standard server revenue increased 9%, with blade revenue growth of 38%. Networked storage revenue grew 1%, with revenue growth of 11% in the midrange EVA line offset by declines in the high-end array and tape businesses. Business critical systems revenue declined 4%, as Integrity systems growth of 77% was offset by declines in PA-RISC and Alpha. Operating profit was $502 million, or 10.7% of revenue, up from a profit of $404 million, or 9.0% of revenue, in the prior year period.

HP Services

HP Services (HPS) revenue increased 5% year-over-year to $4.1 billion. Revenue in Technology Services was flat over the prior year period, with Consulting and Integration revenue up 7% and Managed Services revenue up 16%. Operating profit was $505 million, or 12.4% of revenue, up from a profit of $322 million, or 8.3% of revenue, in the prior year period.

Software

Software revenue was $349 million, an increase of 14% year-over-year, with revenue in HP OpenView up 28% and revenue in HP OpenCall down 11%. Operating profit was $60 million, or 17.2% of revenue, up from a profit of $28 million, or 9.2% of revenue, in the prior year period. On Nov. 7, HP announced that it had closed the purchase of Mercury. The deal integrates Mercury's leading application management and delivery and IT governance capabilities with HP's broad portfolio of management solutions to create a new HP Software organization that will lead the industry in business technology optimization.

Financial Services

HP Financial Services (HPFS) reported revenue of $545 million, an increase of 6% year-over-year. Financing volume increased 1% over the prior year period, and net portfolio assets grew 4%. Operating profit was $35 million, or 6.4% of revenue, down from a profit of $52 million, or 10.1% of revenue, in the prior year period.

Asset management

Inventory ended the quarter at $7.8 billion, up $286 million sequentially and $873 million year-over-year. Accounts receivable grew $1.2 billion sequentially and increased $970 million over the prior year period to $10.9 billion. HP's dividend payment of $0.08 per share in the fourth quarter resulted in cash usage of $219 million. HP utilized $1.0 billion of cash during the fourth quarter to repurchase approximately 30 million shares of common stock. In addition, HP received approximately 13 million shares of common stock under the company's prepaid variable share purchase program. HP exited the quarter with $16.4 billion in gross cash, which includes cash and cash equivalents of $16.4 billion, short-term investments of $22 million, and certain long-term investments of $20 million.

Full year fiscal 2006

Net revenue for the full fiscal year 2006 was $91.7 billion, representing growth of 6% over the prior year period, or 7% when adjusted for the effects of currency. GAAP operating profit was $6.6 billion and GAAP diluted earnings per share (EPS) was $2.18 per share, up from $0.82 in the prior year period. Non-GAAP operating profit was $7.4 billion, with non-GAAP diluted EPS of $2.38, up from $1.62 in the prior year period. Non-GAAP financial information excludes $579 million of adjustments on an after-tax basis, or $0.20 per diluted share, related primarily to restructuring-related costs and amortization of purchased intangibles. GAAP and non-GAAP financial information include stock-based compensation expense in the current financial period only. Cash flow from operations for the full fiscal year 2006 was $11.4 billion, up from $8.1 billion in the prior year period.

Outlook

HP estimates Q1 FY07 revenue will be approximately $24.1 billion to $24.3 billion.

First quarter FY07 GAAP diluted EPS is expected to be in the range of $0.55 to $0.57, and non-GAAP diluted EPS is expected to be in the range of $0.60 to $0.62. Non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.05 per share, related primarily to the amortization of purchased intangible assets. First quarter FY07 GAAP and non-GAAP diluted EPS estimates include approximately $0.04 of stock-based compensation expense.

HP estimates full year FY07 revenue will be approximately $97.0 billion.

FY07 GAAP diluted EPS expected to be in the range of $2.28 to $2.33, and FY07 non-GAAP diluted EPS is expected to be in the range of $2.48 to $2.53. FY07 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.20 per share, related primarily to the amortization of purchased intangible assets. Full year FY07 non-GAAP and GAAP diluted EPS estimates include approximately $0.14 of stock-based compensation expense.

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