By Susan Kelly August 16, 2004 -- Hewlett Packard (NYSE: HPQ) recently announced third quarter revenues of $18.9 billion, an increase of 9% year-over-year. Non-GAAP operating profit was $846 million for the quarter. Non-GAAP diluted earnings per share (EPS) was $0.24 for the quarter, as compared to $0.23 in the prior year period. Non-GAAP diluted EPS and non-GAAP net earnings include a $142 million adjustment on an after-tax basis, or $0.05 per diluted share. GAAP operating profit for the quarter was $657 million. GAAP diluted EPS was $0.19 per share, up 90% from $0.10 in the prior year period. Topics of this summary: Top Line Performance Segment Performance Guidance Q & A Top Line Performance Chairman and CEO, Carly Fiorina reported that "although we are satisfied with our performance in Personal Systems, Imaging and Printing, Software and Services, these solid results were overshadowed by unacceptable execution in Enterprise Servers and Storage. Here execution costs us and we therefore are making immediate management changes. We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter." Raine Radar Analyst: Chairman Fiorina played it safe with this earnings call and basically read from the press release, not adding any commentary of her own. The surprise loss of $208 million from the Enterprise Storage and Services Group gave Fiorina a “black eye” with analysts since she previously guaranteed that every HP business unit would be profitable in 2004. She was emphatic that all HP groups will restore profitability by Q4. In the Q&A session, Carly took a lot of heat about the SAP disruption and consistency of financial results. Again, she was asked to comment on IT spending and the state of the economy which the Chairman played extremely conservative. She once again read from a scripted response since her previous earnings call answers have tanked HP stock price. HP seems to be shifting overall to lower margin businesses and certainly gave the signals that the Imaging and Printing Group is major source of future growth. During the quarter, and on a year-over-year basis, revenue in the Americas grew 4% to $8.4 billion, Europe grew 14% to $7.5 billion, and Asia Pacific grew 11% to $3.0 billion. On a total company basis, and when adjusted for the effects of currency, third quarter revenue grew 5% year-over-year. Average selling prices increased 2% year over year. Segment Performance The Technology Solutions Group (made up of Enterprise Storage and Services, Software and HP Services) reported revenue of $7.0 billion, up 4% from the prior year period. Operating profit for the quarter totaled $56 million, down $209 million year-over-year. The Personal Systems Group revenues totaled $5.9 billion, an increase of 19% year-over-year. Desktop revenue increased 26% year-over-year, while notebook revenue grew 12%. Commercial revenue grew 20% and Consumer revenue grew 19%. Personal Systems reported an operating profit of $25 million, up from a loss of $56 million in the prior year period. The Imaging and Printing Group posted record third quarter revenue of $5.6 billion, up 8% year-over-year. During the quarter HP shipped almost 10 million printers, bringing total shipments to approximately 320 million units worldwide. Business hardware grew 8% year-over-year driven by strong unit shipments in color and mono lasers, business inkjets and MFPs. Home hardware decreased 5% with all-in-one unit sales growth offset by declining single-function printers and normal seasonality. Supplies grew 9% fueled by strong growth in color and monochrome laser supplies. Digital Imaging grew 11% as strong digital camera unit shipments helped offset an expected decline in scanner market. Operating profit of $837 million was also a third quarter record and represented 14.8% of revenue. Software reported record quarterly revenue of $223 million, an increase of 17% year-over-year. HP OpenCall revenue increased 8% over the prior year period. HP OpenView revenue increased 26% year-over-year. Software reported an operating loss of $45 million, as the company continues to make strategic investments that support the HP Adaptive Enterprise strategy. HP Services revenue grew 12% year-over-year to $3.5 billion reflecting continued strength in Managed Services, which grew 42% year-over-year. Customer Support grew 7% year-over-year and revenue in Consulting and Integration increased 6%. Operating profit was $309 million, a decrease of $26 million over the prior year and represented 8.9% of revenue. Financial Services reported revenues of $488 million, up 10% year-over-year, reflecting its highest quarterly revenue in five quarters. Operating profit was $42 million, an increase of $23 million from the prior year period, and represented 8.6% of revenue, the highest level in several years. posted revenue of $469 million a 6% decrease on a year over year basis, but a 6% increase sequentially. Guidance HP estimates fourth quarter revenue will be in the range of $21.0 billion to $21.5 billion, and fourth quarter non-GAAP earnings per share will be in the range of $0.35 to $0.39. Q & A HP’s did not share names of the management changes and will do through press releases. Carly wants to be cautious with EPS guidance and is lowering HP’s financial targets. The SAP migration happened early in the quarter and they did not get the normal lift for the quarter end. Business has been more muted for this quarter than anticipated. HP did not compensate for higher shipments in other segments. When asked about the weakness in the consulting business, Carly disagreed and cited a 7% growth in revenue over last quarter but down year over year. In general, Carly is happy with their performance. For Managed Services the profitability will increase each quarter as larger deals are coming in so HP will see increasing pressure on margins. Holiday product announcements have not been delayed and HP is looking forward to making announcements at the end of August. Systems migration in US (ISS primarily) and Storage accounted for 40% each and EMEA was 20% for the shortfall in Q3 profitablity. Unix business was up and others down, such as Alpha Nonstop which was affected dramatically. “This does not represent a fundamental change in the market.” according to Fiorina. Negative profitability factors are being mitigated by HP and there is no incremental change in their pricing plan for ESS. These are not new initiatives but ones that are getting a great deal of management focus at this time. Given the HP stock price, the plan to do a share repurchase is a possibility and they would not indicate definite plans at this time. When asked to comment on the state of the economy and IT spending, Carly gave a calculated response and stated, “it is fair to say in the last month of the quarter, we did see a slowing, a stutter step, in buying which is why we did not see the normal acceleration of demand at the end of the quarter. We remain conservative about IT spending in 2004 and this is still appropriate for us at this time.” HP is not as competitively positioned for Storage and the September launches should make them more competitive versus any speculation that its the weakness in the Storage market. SAP transition took six-plus weeks versus a planned three weeks which hurt HP’s business in the quarter. Software cash losses were not identified. HP has done a number of acquisitions, which probably accounts for approximately $20-25 million in non-cash charges. Headcount at the end of the third quarter was down 4000 from the beginning of the quarter. HP has included $20 million in headcount reductions in their financials. Two-thirds of the increased inventory is from the Imaging and Printing Group which was planned for the back-to-school seasonal cycle.