By Susan Kelly December 1, 2004 -- Hewlett Packard (NYSE: HPQ) HP recently reported financial results for its fourth fiscal quarter ended Oct. 31, 2004. Fourth quarter revenue increased 8% year-over-year to $21.4 billion. Non-GAAP operating profit was $1.5 billion, with non-GAAP diluted earnings per share (EPS) of $0.41, up 14% from $0.36 in the prior-year period. GAAP operating profit for the quarter was $1.3 billion. GAAP diluted EPS was $0.37 per share, up 32% from $0.28 in the prior-year period. Raine Radar: Fourth quarter results solidified the HP strategy to focus on their Imaging and Printing group. This was a record year for this segment and HP shipped their largest volume for printers in any quarter. Digital printer sales remain strong and GraphExpo was an excellent tradeshow for HP. However, the next challenge remains: connect the user’s applications to a low-cost, easy-to-use production delivery system. HP will need to focus on and solve the middleware equation in 2005 if they are to keep their momentum with Indigo sales. Solving today’s issues around increasing speed, larger formats, or inline coatings will look tame compared to the development required for connecting software applications that will make targeted one-to-one marketing a reality. Topics of this summary: Quarter Highlights Segment Performance Guidance Q & A Quarter Highlights Record quarterly revenue of $21.4 billion, up 8% year-over-year Non-GAAP operating profit of $1.5 billion, $0.41 earnings per share GAAP operating profit of $1.3 billion, $0.37 earnings per share Record revenues achieved in every business Imaging & Printing operating margin of 16.6%; Personal Systems operating margin of 1.2%; Enterprise Storage & Servers operating margin of 2.6%, up $315 million sequentially; HP Services operating margin of 10.0%; Software approaches breakeven Segment Performance Technology Solutions Group is made up of Enterprise Storage and Servers, Software and HP Services. The group reported revenue of $8.0 billion, up 10% from the prior-year period. Operating profit for the quarter totaled $469 million, or 5.8% of revenue. Within this group: Enterprise Storage and Servers reported revenue of $4.1 billion, up 7% year-over-year, and 22% sequentially. Industry-standard server shipments increased 18% year-over-year, with revenue up 16% year-over-year and 23% sequentially. Revenue in Business Critical Systems grew 3% year-over-year and 26% sequentially. Within BCS, revenue in HP-UX increased 8% year-over-year, Alpha declined 27%, and NonStop revenue increased 13%. Networked storage revenue was down 9% year-over-year, but up 16% sequentially, as the company continued to add storage sales specialists and transition product offerings. Enterprise Storage and Servers reported a quarterly operating profit of $107 million, or 2.6% of revenue, up from a loss of $208 million in the third quarter. HP Services revenue grew 13% year-over-year to a record $3.7 billion, reflecting continued strength in Managed Services, which grew 35% year-over-year. Customer Support grew 10% year-over-year and revenue in Consulting and Integration increased 4%. Operating profit was $367 million, representing 10.0% of revenue. Software reported record quarterly revenue of $277 million, an increase of 25% year-over-year. HP OpenView revenue increased 30% year-over-year. HP OpenCall revenue was up 17%. Software reported an operating loss of $5 million, an improvement of $17 million from the prior-year period. Personal Systems Group revenue grew 9% year-over-year to a record $6.5 billion. Units grew 11% year-over-year, reflecting stable average selling prices. Desktop revenue increased 6% year-over-year, with notebook revenue up 12%. Commercial revenue grew 12% over the prior-year period, while Consumer revenue grew 4%. Personal Systems reported an operating profit of $78 million, or 1.2% of revenue, the strongest profit performance since 2000. Imaging and Printing posted record quarterly revenue of $6.5 billion, up 5% year-over-year. During the quarter, HP shipped 14 million printers, the strongest volume quarter ever. Business hardware revenue grew 6% year-over-year, driven by strength in color laser, multi-function printers and digital press. Home hardware revenue decreased 2% with All-in-One unit sales growth offset by declining single-function printers and price erosion. Supplies revenue grew 8%, fueled by strong growth in color printing. Operating profit of $1.1 billion was a quarterly record and represented 16.6% of revenue. HP Financial Services reported revenue of $497 million, up 8% year-over-year, reflecting HP's highest quarterly revenue in six quarters. Finance volume, a leading indicator of future revenue, reached its highest level in two years and total portfolio assets also increased over the prior-year period. Operating profit was $19 million, or 3.8% of revenue, reflecting increased reserves related to certain aged receivables. Inventory ended the quarter at $7.1 billion, up $326 million from the prior quarter and up $1.0 billion year-over-year. Trade receivables increased $1.8 billion from the prior quarter to $10.2 billion. HP's dividend payment of $0.08 per share in the fourth quarter resulted in a cash use of $240 million. In addition, HP repurchased $2.2 billion of stock during the fourth quarter. HP ended the quarter with $13.0 billion in gross cash, which includes cash and cash equivalents of $12.7 billion and short- and certain long-term investments of $0.3 billion. Guidance HP estimates first half FY05 revenue will be in the range of $41.8 billion to $42.3 billion, and first half non-GAAP earnings per share will be in the range of $0.72 to $0.74. Q & A Although ESS (Enterprise Storage and Servers) is a high-cost business, HP feels that their performance in Q4 will provide confidence that expected numbers will be met. HP’s strategy in the PC business is related to having appropriate scope and scale, competitive growth and steadily improving profitability, rather than achieving “bragging rights” for being number one in the market. The Managed Services business was not “in the black” for the fourth quarter, but bottom line performance improved over the third quarter. HP is looking to that business to be profitable in the first half of fiscal 2005. Most of the cost reduction efforts referred to are in ESS and HP Services. These figures will be seen in Operating Expense and Cost of Sales Gross Margin. Most of these efforts will continue into fiscal 2005. HP feels that the Enterprise environment has improved, while the Consumer environment remains steady. Currency, specifically the weaker dollar, is a key reason that HP raised the top line estimates. However, these estimates were raised due to a strong fourth quarter as well. HP will be getting more aggressive regarding hardware and continues to balance top line growth with bottom line profitability. HP Consumer PC business and Commercial PC business are now profitable. This is due to improving supply chain and increasing volume direct business. HP sees a stronger growth in Desktop over Notebooks. “Desktops are making a comeback”, says Carly Fiorina, HP chairman and chief executive officer.