HP Inc.
Q4 2005 Earnings Call Transcript

Published: 28 Nov 2005

[Operator:]

Good day, ladies and gentlemen, and welcome to the Hewlett-Packard Q4 FY '05 Earnings Conference Call. My name is Rachel, and I'll be you coordinator today. Operator Instructions As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Brian Humphries, VP of Investor Relations.

[Brian Humphries:]

Thank you, Rachel, and good afternoon, everyone. I'd like to welcome you to our fourth quarter earnings conference call. Joining me today is our CEO and President, Mark Hurd; and CFO, Bob Wayman. Before we get started, I'd like to remind you that this call is being Webcast live. The Webcast and the fourth quarter earnings slide presentation, including GAAP reconciliation tables, can be accessed on HP Investor Relations page under Company Information at www.hp.com. A replay will also be available shortly after the conclusion of the call for approximately one year. Next, it is my duty to inform you that the primary purpose of this call is to provide you with information regarding the fourth quarter. However, some of our comments and responses to your questions may include forward-looking statements. These forward-looking statements are based on certain assumptions and are subject to a number of risks and uncertainties, and actual future results may vary materially. I encourage you to read the risk factors described in the Company's quarterly report on Form 10-Q for the fiscal quarter ended July 31st, 2005, as well as subsequent SEC filings after our FY '04 Form 10-K for an understanding of the factors that may affect the Company's businesses and results. I'd also like to point out that earnings, gross margins, operating expenses, and similar items discussed at the Company level are generally expressed on a non-GAAP basis and, therefore, have been adjusted to exclude certain acquisition-related charges, in-process R&D charges, amortization of goodwill and purchased intangibles, restructuring charges, and net investment losses. A presentation of GAAP financial information for the present quarter and a reconciliation of non-GAAP amounts to GAAP are included in the financial statements accompanying today's earnings release, which is also available on the HP Investor Relations page under hp.com. Finally, we have a lot of people on today's call, and with a view to allowing time for multiple questions from multiple firms, please refrain from asking multi-part questions and please save clarifications for call-back after the call. With that, I'll turn the call over to Mark Hurd.

[Mark Hurd:]

Thanks, Brian. Well, good afternoon, and thank you for joining us. I'm pleased with our fourth quarter results. We delivered solid operational results, saw margin expansion in some of our key businesses, had good cost discipline, generated strong cash flow, and continued to make progress on key initiatives. The employees of HP have been working hard, and our efforts are paying off. Let me give you some highlights of the quarter. First, net revenue growth of 7%, year-over-year, or 6% in local currency. Non-GAAP EPS growth of 24% year-over-year. Continued operating margin expansion in key businesses, with Personal Systems' operating margins of 2.8%, Enterprise Storage and Servers' margins of 9.1%, and Software margins of 8.7%. Our third consecutive quarter of solid printer hardware unit growth in Imaging and Printing, one of the leading indicators of future supplies growth. Cash flow from operations of 1.9 billion, bringing the year-to-date total to 8 billion, and share repurchases of 1.4 billion, bringing the year-to-date total to 3.5 billion. Our performance in the fourth quarter, coupled with a solid third quarter, triggered significant employee bonuses for the second half of fiscal 2005. And the fourth quarter impact of this is reflected in the segment results. Now turning quickly to the business segments. During the fourth quarter, Imaging and Printing revenue grew 4% year-over-year, to 6.8 billion, with Consumer Hardware revenue down 4% and Commercial Hardware revenue and Supplies revenue up 4% and 7%, respectively. Segment operating profit was 896 million, or 13.2% of revenue. During the quarter, overall printer hardware unit growth was 8%, with consumer printer hardware unit shipments up 6% and commercial printer hardware unit shipments up 16%. Within these categories, we saw strong unit shipment growth in key initiatives, with All-In-One unit shipments up 25% year-over-year, color laser unit shipments up 41% year-over-year, and enterprise multi-function printer shipments up 83%. We are focused on driving unit growth of high-ink consumption units, and we're confident that this will drive solid supplies growth. We've also seen strong acceptance of products based on our recently introduced, Scaleable Print Technology, a breakthrough in the architecture and manufacturing of the ink jet printhead. This allows us to deliver record print speeds in the home and office, and can be scaled to a broad set of high-volume printing applications, making it one of our most significant announcements in recent years. We're also focused on success in the high end, with our digital press wide-format graphics initiatives. On November 1st, we closed our acquisition of Scitex, expanding our leadership in large-format printing into the industrial super-wide category. And at PRINT 05, we announced major advances in the digital transformation of the graphics art industry, further consolidating our leadership position. This is a significant opportunity for HP, and we're aligning significant resources behind the commercial print opportunity. Moving now to Personal Systems, we continued to show a balanced approach to revenue growth and operating margin improvements. Revenue grew 9% year-over-year, to 7.1 billion, with particular strength in notebooks, where revenue increased 23%. Our consumer business had another excellent quarter, with revenue growth of 14% year-over-year and strong operating margins. Consumer notebook shipments increased 48% over the prior year period, demonstrating HP's competitive strength and strong retail presence, as well as the shift to mobility. Revenue in commercial clients increased 8% year-over-year, with notebooks posting strong growth and profitability improvements. Our workstation business continues to post solid results, delivering share gains, strong year-over-year revenue growth, and excellent profitability. Segment operating profit was 200 million, or 2.8% of revenue, representing the fifth consecutive quarter of operating margin improvement in Personal Systems. The team has done an excellent job turning around the profitability of the PC business, and operating margins have now increased for each of the last four quarters, with full year fiscal '05 margins at 2.5% of revenue. Enterprise Storage and Servers had a strong quarter, with revenue up 10% year-over-year, to 4.5 billion and operating profit of 405 million, or 9.1% of revenue. Over the past 12 months, the Enterprise Storage and Server team is focused on various operational levers to improve the momentum and profitability of the business. This quarter's results reflect their efforts in turning around the business and demonstrating the financial leverage of the model. Within ESS, revenue in industry-standard servers increased 12% year-over-year, reflecting continued, solid execution on a number of fronts, including discount controls, option attach rates, and unit mix. We continue to see strength in server blades, where revenue increased 65% over the prior-year period. Revenue in business critical systems declined 1% year-over-year. We continue to see solid momentum in Integrity servers, with revenue up 70% year-over-year. And this was offset by weakness in PA-RISC and Alpha. Storage revenue increased 17% year-over-year, reflecting improved execution and solid growth in every product category and every region. We saw ongoing strength in the mid-range, with EVA revenue up 44% year-over-year. We also had solid growth at the high end, where XP revenues increased 32% over the prior-year period. We will continue to work hard on key initiatives, such as sales specialists hiring and our alignment with enterprise VARs to drive sustainable momentum in Storage. Revenue in HP Services grew 6% year-over-year, to 3.9 billion, within HPS, Technology Services grew 4%, Managed Services grew 9%, and Consulting and Integration revenue grew 11%. We're working on driving greater efficiency and leveraging the Services organization, be it delivery model improvements and investments in lower-cost locations. We are also working to leverage the R&D investments in OpenView to reduce the cost structure of Services, and to optimize our R&D road map. Segment operating profit was 322 million, or 8.3% of revenue. As in the third quarter, HP Services' margins were pressured by the Company bonus accrual, given the headcount intensity of the business. If you exclude the fourth quarter bonus accrual, operating margins in Managed Services and Consulting and Integration were at their best levels in two and three years, respectively. And operating margins in Technology Services were at their highest levels in fiscal year '05. However, we need to deliver solid margins, while absorbing the Company bonus payments, and we’ll continue to work hard on the operations of the business to drive to this goal. Turning to Software, revenue grew 11%, to 311 million, with growth in OpenView and OpenCall of 16% and 3%, respectively. Software delivered its first ever operating profit, with segment operating profit of 27 million, or 8.7% of revenue. We are pleased to be in the black, and will continue to work on revenue growth and productivity initiatives, as well as cost discipline. During the quarter, we continued to strengthen our Software offerings with the pending acquisition of Peregrine. The acquisition will add key asset and service management components to the HP OpenView portfolio, a distributed management software suite for business operations and IT. Peregrine's capabilities include

[Bob Wayman:]

Thank you, Mark, and good afternoon, everyone. Let me begin with a quick review of the performance of our Financial Services business. Revenue for HPFS during the quarter was 514 million, up 3% year-over-year and 5% sequentially. Operating margin was 10.1%, up from 3.8% last year, and down from 11.9% in Q3. The improvement in margin is largely due to the fact that Q4 '04 results were adversely impacted by the recording of reserves for certain receivables. During the course of FY '05, the risk profile of the portfolio has steadily improved, and the reserve levels have been adjusted accordingly. Financing volume decreased 1% year-over-year, and was up 21% sequentially. Portfolio assets decreased 3% year-over-year, and increased 1% sequentially. Now, onto the key elements of the P&L. Non-GAAP EPS was $0.51, up from $0.41 a year ago. GAAP EPS for the quarter was $0.14, which included 1.1 billion, or $0.37, in after-tax adjustments that were not included in our non-GAAP results. The majority of the adjustments relate to pre-tax restructuring charges of 1.6 billion, which is a more significant charge than the 1.1 billion that we estimated when we announced our restructuring in July. The increase over our initial estimates is due to the following