By Trevor Shackelford February 20, 2006 -- Hewlett-Packard Co., (NYSE: HPQ) announced their first quarter results last week. Total revenue for HP's first quarter was $22.7 billion, 6% higher than the $21.5 billion reported for the first quarter of 2005. GAAP operating profit for the quarter was $1.5 billion and GAAP diluted EPS was $0.42 per share, up from $0.32 in the prior-year period. Non-GAAP operating profit was $1.7 billion, with non-GAAP diluted earnings per share of $0.48, up from $0.37 per share reported in the first quarter of 2005. Non-GAAP financial information for the first quarter excludes $166 million of adjustments on an after tax basis, or $0.06 per diluted share, related primarily to amortization of purchased intangibles, and in-process research and development-related costs. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • During the quarter, the company eliminated approximately 1,800 positions as a part of its restructuring program and brought the cumulative total to 6,500. • During the quarter, the company closed the Scitex and Peregrine acquisitions, and announced a definitive agreement to acquire Outer Bay, a provider of archiving software for enterprise applications and databases. • At the end of first quarter, inventory was $6.7 billion, down $389 million year-over-year and $146 million sequentially. • At the end of first quarter, trade receivables were $8.7 billion, flat year-over-year and down $1.2 billion sequentially, in line with normal seasonality • DSO now stands at 34 days, down from 36 days last year and 39 days sequentially. • On a net basis, CAPEX was $322 million, down 23% year-over-year and 28% sequentially. • Cash flow from operations for the quarter was $1.8 billion. Free cash flow was $1.5 billion, up 34% last year. • During the quarter, the company repurchased $1.4 billion in stock; in addition the board authorized an additional $4 billion for further repurchases and paid $227 million or $0.08 per share for normal dividend. • During the quarter, the company entered into a $1.7 billion prepaid forward variable share repurchase program with a third-party investment bank. • At the end of first quarter, total gross cash balance was $12.0 billion, down from $13.6 billion year-over-year and $13.9 billion sequentially. Segment Performance During the quarter, on a year-over-year basis, revenue in the Americas grew 10% to $9.7 billion. Revenue from Europe, the Middle East and Africa (EMEA) grew 1% to $9.4 billion, and the Asia Pacific region grew 6% to $3.5 billion. Adjusted for the effects of currency, revenue was up 9% in the Americas, 8% in EMEA and 9% in Asia Pacific. Imaging and Printing Group (IPG) The segment posted quarterly revenue of $6.5 billion, up 8% year-over-year. On a year-over-year basis, consumer hardware revenue increased 1%, led by a 20% growth in all-in-one units. Commercial hardware revenue grew 6%, with unit shipments of color laser printers up 36% and printer-based MFP shipments up 40%. Supplies revenue grew 11%. Operating profit was $973 million, or 14.9% of revenue, up from a profit of $932 million, or 15.4% of revenue reported in the prior-year period. Personal Systems Group (PSG) Revenue for the segment grew 8% year-over-year to $7.4 billion, with unit shipments up 16%. On a year-over-year basis, desktop revenue increased 1% and notebook revenue grew 26%. Commercial PC revenue grew 6% year-over-year, while consumer PC revenue increased 18%. PSG reported an operating profit of $293 million, or 3.9% of revenue, up from a profit of $147 million, or 2.1% of revenue reported in the prior-year-period. Enterprise Storage and Servers (ESS) The segment reported revenue of $4.2 billion, up 5% over the prior year period. On a year-over-year basis, industry-standard server revenue increased 6%, networked storage revenue grew 4% and business-critical systems revenue grew 1%. ESS reported an operating profit of $326 million, or 7.7% of revenue, up from a profit of $69 million, or 1.7% of revenue reported in the prior-year period. HP Services (HPS) Revenue declined 2% year-over-year to $3.8 billion. On a year-over-year basis, technology services revenue declined 2%, while managed services and consulting and integration declined 1% each. Excluding the effects of currency, HPS revenue grew 3% year-over-year. Operating profit was $293 million, or 7.8% of revenue, up from a profit of $281 million, or 7.4% of revenue reported in prior-year period. Software Software reported quarterly revenue of $304 million, an increase of 29% year-over-year, with revenue in HP Open View and HP Open Call increasing 34% and 19%, respectively. During the quarter, HP closed the acquisition of Peregrine Systems, Inc., which adds key asset and service management components to the HP Open View portfolio. Software reported an operating profit of $9 million, or 3% of revenue, compared with a loss of $38 million reported in the prior-year period. Financial Services HP Financial Services (HPFS) reported revenue of $496 million, a decrease of 11% year-over-year. Finance volume and net portfolio assets declined 10% and 2% respectively. Operating profit was $38 million, or 7.7% of revenue, down from a profit of $45 million, or 8.1% of revenue reported in the prior-year period. Guidance HP estimates second quarter 2006 revenue will be in the range of $22.4 billion to $22.6 billion, with GAAP earnings per share in the range of $0.43 to $0.45. Non-GAAP diluted earnings per share are expected to be in the range of $0.47 to $0.49. HP estimates full year 2006 revenue to be in the range of $90 to $91 billion, with full year GAAP earnings per share expected to be in the range of $1.72 to $1.77. Non-GAAP diluted earnings per share are expected to be in the range of $1.90 to $1.95. Raine Radar HP has a lot to be proud of. It wasn’t that long ago that the prediction was that HP would continue to lose market share to Dell in computers, and in HP’s historically strongest business: printers. Now Dell appears to be the one on the defensive. All of HP’s main businesses are on the rise, led by all-in-one printers and a big jump in notebook sales. Combine this with continued cost savings from reorganization and it looks like HP is a company that is getting back into shape and being more aggressive in the marketplace. Q & A 1. Concerning its restructuring efforts, HP said that it is on track with its year-and-a-half long plan. The company did not quantify the restructuring impact on operating margins. 2. So far the company has released 6,500 people, or approximately 48% of the company’s total expected workforce reduction. Going forward, the company expects more cost reduction as a result of changes in the U.S. retirement and medical plans. 3. On a constant currency basis, the company expects approximately 6% to 8% revenue growth in the second quarter and 2% to 3% for the full year. 4. The company expects revenues to contract 2% to 4% in the second quarter. 5. Currency impact at the beginning of the first quarter was in the range of 2% to 3%. 6. On the storage side, the company was satisfied with its growth rates and said that EVA grew 28% and XP grew 14%. 7. The company saw improved growth rate both in inkjet and laser supplies. 8. The company observed normal seasonality within the quarter. 9. HP hired Thomas Hogan as its new head of software. 10. In terms of acquisition strategy, HP said they are looking for companies with strong technology that would further enhance their portfolio. The company is interested in areas such as storage, servers, and management software. 11. On the service side, the company said that 4% to 6% revenue growth and 8% to 10% operating margin is an appropriate target for the business. 12. The company said that pricing in the market place has been aggressive and continues to be aggressive.