HP Reports Q4 Results: Record Revenue & Profit in Imaging and Printing Unit
Thursday, November 21, 2002
PALO ALTO, Calif.--Nov. 20, 2002-- HP today reported financial results for its fourth fiscal quarter ended Oct. 31, 2002. The company reported fourth quarter revenue of $18.0 billion, compared to $16.5 billion in the prior quarter. Sequentially, revenue increased 9%, while pro forma gross margin increased from 25.7% to 26.6%. GAAP gross margin increased from 24.9% to 26.5%. Pro forma operating expenses as a percent of revenue were down sequentially from 22.5% to 21.7% of net revenue, reflecting progress in merger-related value-capture savings, which were offset in part by costs for the employee performance bonus program, provisions for bad debt, increased R&D and marketing expenditures in the Imaging and Printing segment and currency effects. GAAP operating expenses as a percent of revenue were down sequentially from 39.9% to 24.1% of net revenue, primarily as a result of higher one-time charges for restructuring, in-process research and development and merger-related charges in the prior quarter. Pro forma earnings per share (EPS) for the quarter was 24 cents, compared to 14 cents in the third quarter and 8 cents in the year-ago period on a combined company basis. This represents a pro forma net earnings improvement of 72% sequentially and 203% year over year. GAAP net earnings before extraordinary items improved 364% year over year. Reported GAAP EPS was 13 cents per diluted share, versus a loss of 67 cents last quarter and a loss on a combined company basis of 17 cents in the year ago period. Pro forma EPS reflects a $331 million adjustment on an after-tax basis, or 11 cents on a diluted per share basis. The pre-tax pro forma adjustment includes a $150 million restructuring charge; $151 million of amortization of goodwill and purchased intangible assets; and $155 million for other merger-related items. "We are proud of our progress," said Carly Fiorina, HP chairman and chief executive officer. "We delivered solid results in a tough market. The HP team is executing, customers are responding and we're beginning to deliver on the promise of the merger. We feel good about our trajectory." "HP's revenue grew sequentially in every business and in every region," Fiorina stated. "Operating profit improved sequentially in Enterprise Systems, Personal Systems, HP Services, and Imaging and Printing. Cost structure improvements are helping us compete more aggressively, improve our market position and grow top line revenues; and HP generated $1.5 billion in cash from operations in the quarter." Personal Systems cut its operating loss by more than 50 percent sequentially, continued to make progress in direct distribution, stabilized the channel with HP's new partnerONE program, grew sequentially in both consumer and commercial PCs, managed channel inventories lower, and reinforced the company's leadership in innovation with successful new product launches. Enterprise Systems showed solid revenue and profit improvement in a weak IT market with quarter-over-quarter growth in every region and in every business unit, reducing operating losses by more than 60% sequentially. HP Services returned to double-digit profitability in the quarter and posted continued good growth in managed services. Meanwhile, Imaging and Printing posted another record quarter with double-digit sequential growth in revenue and profit in every region, and revenue and share gains across all businesses. HP's 30 largest new business contracts in the quarter - with an average value of more than $120 million each - represent more than $3.7 billion in new long-term revenue. "Six months into the merger, HP has completed the alignment of our global sales force with a single compensation plan, met or exceeded all integration targets, introduced over 100 new products, added roughly 1,400 patents to our worldwide patent portfolio of over 17,000 patents, introduced comprehensive three-year product roadmaps and managed complex product transitions - all while relentlessly focusing on customers," Fiorina said. "We're cutting costs, boosting productivity, delivering more for our customers and shareowners, and investing in the future. Our strategy is working and we're picking up momentum," Fiorina stated. Merger related cost savings for the second half of 2002 were $651 million, 30% above plan. The company completed 12,500 net workforce reductions in the half, 25% above plan. Of the $651 million of merger-related costs savings, $257 million came from workforce reductions, $243 million from direct and indirect procurement savings, and $151 million from other savings, including marketing program cuts and facilities closures in conjunction with our restructuring plans. The company continues to target $3.0 billion of total cost savings. The company is on track to meet 17,900 targeted job reductions by the end of fiscal 2003, in part due to an additional 1,100 positions that are part of a voluntary workforce reduction primarily in Japan in the fourth quarter of fiscal year 2002. All pro forma numbers have been adjusted consistently over comparable periods to exclude certain acquisition-related charges and inventory write-downs, in-process research and development charges, amortization of goodwill and purchased intangibles, restructuring charges, net investment gains and losses, net gains and losses on divestitures, and extraordinary litigation gains and losses, to provide a more meaningful discussion of the company's operational results. A reconciliation of the specific pro forma adjustments to the GAAP results for this quarter and the year-ago period is included in the pro forma income statement in this release. Business Segment Results Imaging and Printing Imaging and Printing delivered record revenue and operating profit in the quarter. Revenue in the segment, which includes home and business imaging and printing devices, digital imaging and publishing systems, consulting services and printing supplies, increased 18% sequentially due in part to seasonality and 12% year-over-year to $5.6 billion. Imaging and Printing delivered year-over-year growth with revenue and share gains in digital imaging, share gains and shipment growth in inkjet hardware, and continued strong supplies growth. IPG posted a record quarterly operating profit of $926 million, up 14% sequentially, due in part to seasonality, and up 89% year over year. As a percent of revenue, operating profit for the segment was 16.5%, compared to 17.2% last quarter and 9.8% in the prior year quarter. These results reflect strong supplies performance, improved manufacturing efficiencies, and delayed price reductions due to hardware availability. Supplies revenue grew 14% sequentially and 17% year-over-year, fueled by strong sales in ink and toner. According to data from NPD Intellect and IDC analysts, HP maintained or grew its No. 1 position in 18 of the 20 product categories in which it competes, significantly strengthening share in inkjet printers, all-in-one printers and color LaserJet markets. Photosmart printers, photo media and personal LaserJets also demonstrated strong share growth. Digital cameras and projectors, both relatively new categories for HP, are the only two categories in which HP does not hold the No. 1 position. The quarter's highlights included a strong response to the company's "Big Bang" consumer launch of approximately 50 new imaging and printing products. "Big Bang" has strengthened HP's market position in advance of the holiday selling season and is already resulting in significant share gains. Imaging and printing products won more than 50 industry awards in the quarter. The subsequent "Big Bang" commercial launch in Q4 has improved HP's competitive position in the business market, including the first sub-$1,000 color LaserJet printer, lowest cost-per-page business inkjet, and the Deskjet mobile printer. During the quarter, HP also unveiled a broad mobile printing initiative, along with new digital cameras, new Photosmart photo printers, the first scanners with automatic photo feeder, and new all-in-ones. Personal Systems Personal Systems executed well in Q4, cutting operating loss from the previous quarter by 56%, managing total channel inventories to 4.3 weeks, showing continued progress in distribution efficiency and reinforcing HP's leadership in innovation. The segment includes business and consumer PCs, workstations, notebooks, handhelds and DVD+RW drives. Revenue in this segment was $5.1 billion, up 6% sequentially and down 6% year over year on a combined company basis. Consumer PC revenue was up 16% sequentially and down 13% year over year, and business PC revenue increased 3% sequentially and remained flat year over year. Personal Systems operating margin was negative 1.7%, compared to negative 4.2% last quarter and negative 7.0% a year ago. The year over year margin improvement in part reflects steady progress against value capture goals. HP's direct business represented 27% of all shipments in North America and 46% of commercial shipments in North America. In addition, worldwide commercial channel inventories are at 3.0 weeks and worldwide consumer channel inventories are at 6.3 weeks, an appropriate level leading into the holiday buying season. On Nov. 1, the company launched its partnerONE program in the United States, which rationalized more than 40 partner programs into one easy, efficient program that spans HP's entire product and services portfolio. IDC data for the calendar third quarter shows that HP's PC business grew faster than the market in the U.S. sequentially and increased its share of U.S. PC shipments by one point. HP has also recently introduced innovative new products, including the Tablet PC, Media Center PC, new iPAQ Pocket PC designs and price points, a first-ever mobile workstation, two Itanium 2-based workstations that will support UNIX, Windows and Linux, and innovative new monitors. HP's Personal Systems wins during the quarter included four large contracts with an average value of more than $65 million. Key customer wins included a contract worth more than $100 million to provide 200,000 desktop PCs and support services for a new communications service by Colombia's largest public utility; Home Depot's selection of HP to provide 40,000 PCs across 1,456 stores in the U.S. to improve operations, customer service and employee education; the New York Stock Exchange's selection of HP iPAQs to build a wireless order management tool for the trading floor; and Staples' selection of desktop and notebook PCs, servers and printers in a multi-year agreement. Enterprise Systems Enterprise Systems made significant progress in the quarter. Operating loss was $152 million, a $270 million improvement from the previous quarter, reflecting substantial progress in reducing structural costs. Enterprise Systems includes a broad range of systems and solutions, including management software, multi-platform storage, business-critical servers and industry-standard servers. Enterprise Systems recently launched a new software strategy centered on an adaptive management platform, which will enable immediate, intelligent and automatic responses to business changes. Revenue in this segment grew 8% sequentially and declined 5% year over year to $4.1 billion. This reflects sequential growth in all regions and businesses, driven by good sales force alignment and customer engagement despite continued weakness in global IT spending and aggressive competitive discounting. Enterprise Systems operating margin was negative 3.7%, compared to negative 11.2% last quarter and negative 7.0% a year ago. Overall, business-critical servers revenue was up 12% sequentially and down 14% year over year. Industry-standard servers revenue was up 4% sequentially and up 3% over last year. Revenue in storage was up 14% sequentially and down 5% year over year. Revenue in software was up 2% sequentially and down 15% year over year. Highlights included strong sequential growth in server unit shipments, with HP leading all vendors with 30 percent market share worldwide, according to third-calendar-quarter reports from Gartner Dataquest. HP ranked as the No. 1 supercomputing supplier on the TOP500 Supercomputer Sites list, with HP Superdome systems leading the list's enterprise category. Superdome revenue was up 58% sequentially. Other highlights included strong sequential growth in Storage with a 17% increase in on-line storage revenues; the 18th consecutive quarter of Linux market-share leadership; and completion of software transitions to focus on OpenView and Utility Data Center products. The 10 largest enterprise customer wins, including Canadian Imperial Bank of Commerce (CIBC) - totaled nearly $2.9 billion - and represented head-to-head wins over our largest competitors. Key wins included: selection by two of the three largest U.S. Air Force commands as the standard server and storage provider for 160,000 Air Force personnel; a $200 million win with Ericsson for StorageWorks, ProLiant and UNIX servers; a $105 million contract with DHL to provide UNIX servers, storage and mission-critical support services for the company's three main data centers worldwide; and a $22 million supercomputer win with Wellcome Trust Sanger Institute to expand scientific research into genomics. Services HP Services returned to a double-digit profit margin during the quarter and grew above market rates in the managed services business, despite a weak IT services market. HP Services includes customer support, managed services, and consulting and integration. Revenue for HP Services grew 4% sequentially and declined 3% year over year to $3.1 billion, reflecting solid sequential revenue growth in all three lines of business. Operating profit for HP Services was $381 million, or 12.3% of revenue, up 39% sequentially and down 10% year-over-year. Support revenue was up 4% sequentially and was flat year over year. Managed services revenue was up 4% sequentially and up 14% year over year, as customers continue turning to outsourcing to reduce their IT costs. According to a recent Information Week survey of 700 business-technology professionals, HP ranked first in customer satisfaction among outsourcing suppliers. HP earned top marks for, among other things, executing service level agreements and for cost and value. Consulting and integration revenue, which is being more tightly focused for improved profitability, was up in revenue 4% sequentially and down 17% year over year, as customers took on fewer large projects and focused on consolidation. Highlights for HP Services in the quarter included strong demand for Microsoft services, storage services and printing services. Key wins featured a comprehensive $1.5 billion multi-year managed services win with CIBC; a $225 million services and software contract with the Department of Veterans Affairs; a multi-year, multi-million dollar global services contract to provide centralized end-user technical support for 61,000 Microsoft employees, vendors and contractors in up to 68 countries; and a five-year $60 million managed services win with the CAT Group in Europe. Financial Services HP Financial Services offers leasing and financial asset management services to HP customers worldwide, operating as a wholly-owned subsidiary. Revenue was $537 million, up 5% sequentially and down 1% year over year on a combined company basis, with strong results in North America. Operating margin for the segment was negative 18.8%, compared to negative 4.7% last quarter and negative 9.3% in the prior year. Included in the quarter were bad debt expenses of $116 million due in large part to economic deterioration in Latin America. Growth in the quarter was further constrained by tightened credit terms and conditions. Total assets stayed relatively constant quarter to quarter, reflecting a slower market and the relative maturity of the legacy HP portfolio. Asset Management HP exited the quarter with $11.8 billion in gross cash, which includes cash and cash equivalents and short-and long-term cash investments. Inventory ended the quarter at $5.8 billion, a sequential increase of $229 million over Q3. Trade receivables also increased $285 million from the prior quarter to $8.5 billion. Cash generated from operations for the quarter was $1.5 billion, reflecting strong operational results and minimal cash needs for inventory and receivables. In addition, the company funded its pension plan with approximately $360 million in the quarter and paid down $656 million in short-term and long-term debt throughout the quarter. HP's dividend of $0.08 in the fourth quarter resulted in a cash use of $244 million. In addition, HP repurchased $125 million of stock. Outlook For the first quarter 2003, HP affirmed Wall Street consensus estimates of $18.4 billion in revenue and $0.27 earnings per share on a pro forma basis. The company noted that spending for brand and demand generation advertising would be stepped up in first half 2003 over second half 2002. In addition, the company said it would incur additional expenses in the quarter associated with aligning Compaq retirement programs with those of HP.