May 31, 2006 -- Hewlett-Packard Co., (NYSE: HPQ) announced their second quarter 2006 results recently. Total revenue for HP's second quarter was $22.6 billion, up 5% from $21.6 billion reported for the second quarter of fiscal 2005. On a constant currency basis revenues for the second quarter were up 8%. GAAP net income for the second quarter of fiscal 2006 was $1.46 billion, or $0.51 per share, compared to $966 million, or $0.33 per share reported in the same period last year. The company benefited from its restructuring and cost-cutting measures as well as increasing demand in its PC business. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • GAAP operating margin for the quarter was 7.3%, compared to 5.4% reported for the same period last year. • As a part of restructuring, during the quarter, the company eliminated 1,600 positions related to the July announcement, bringing to the cumulative total to about 8,100. • Non-GAAP tax rate for the quarter was 20.5%, slightly up from the guidance of 20%. • Free cash flow for the quarter was $3.2 billion, up 62% from the second quarter of fiscal 2005. • Receivables at the end of second quarter were $9.8 billion, up $517 million year-over-year and up $1.1 billion sequentially. • CAPEX for the quarter was $521 million, down 8% year-over-year and up 22% sequentially. • During the quarter, the company repurchased approximately 47 million shares at a cost of approximately $1.6 billion as a part of its share repurchase program. • During the quarter, the company paid approximately $226 million in dividends. • At the end of second quarter of fiscal 2006, cash and short-term investments were $14.1 billion, compared to $12 billion reported at the end of first quarter of fiscal 2005. Segment Performance Imaging and Printing Group (IPG) HP reported second quarter revenues for the segment of $6.7 billion, up 5% year-over-year. The increase reflects supplies revenue growth of 10% and commercial hardware revenue growth of 4%, partially offset by an 8% decline in consumer hardware revenue. Color and laser unit shipments increased 38% and printer-based MFP shipments increased 44% year-over-year. The company reported 42% growth in HP Indigo press printed page volume. Operating profit for the quarter was $1.04 billion, or 15.5% of revenue, up from $814 million, or 12.7% of revenue reported last year. Personal Systems Group (SPG) Second quarter revenues for the segment were approximately $7.0 billion, up 10% from the revenues reported for the same period last year. The company reported 16% growth in unit shipments with double-digit growth in both consumer and commercial. Operating profit for the quarter was $248 million, or 3.6% of revenue, up from $147 million, or 2.3% of revenue reported last year. The company said that the third quarter of fiscal 2006 for personal systems group would be the seasonally weakest quarter. Enterprise Storage and Servers Segment Q2 revenues for the segment were approximately $4.3 billion, up 2% from the revenues reported for the same period last year. The company reported 4% growth in industry-standard server revenue, with blade revenue growth of 60%. The company posted high-single digit growth in networked storage. The company continued its margin expansion and expense discipline in the second quarter. Operating profit for the quarter was $322 million, or 7.5% of revenue, up from $180 million, or 4.3% of revenue reported last year. HP Services Segment Q2 revenues for the segment were approximately $3.9 billion, down 2% from the revenues reported for the same period last year. Excluding the impact of currency, revenue for the segment grew 2% year-over-year. The company reported 2% growth in managed services, 4% decline in technology services and 2% decline in consulting and integration services. Operating profit for the quarter was $345 million, or 8.9% of revenue, up from $292 million, or 7.3% of revenue reported last year. Software Segment Q2 revenues for the segment were approximately $330 million, up 20% from the revenues reported for the same period last year. The company reported 25% growth in open view and 11% growth in open call. The growth in open view was led by the recent acquisition of Peregrine Systems Inc., which added key asset and service management components to its open view portfolio. Operating profit for the quarter was $3 million, or 0.9% of revenue, compared to an operating loss of $2 million reported last year. Financial Services Segment Q2 revenues for the segment were approximately $518 million, down 5% from the revenues reported for the same period last year. Finance volume declined 14% year-over-year and 7% sequentially. Portfolio assets grew 1% year-over-year. Operating profit for the quarter was $39 million, or 7.5% of revenue, down from $58 million, or 10.7% of revenue reported last year. Guidance The company said that seasonally, Q3 would be the weakest quarter as its revenue from Europe and consumer segment will both be at low points. For the third quarter of fiscal 2006, the company expects that the revenue would decline approximately 4% to 4.5% from the Q2. The company expects that the Q3 2006 revenue will be approximately $21.75 billion and revenue for the full year will be approximately $91.0 billion. The company expects that GAAP diluted EPS will be in the range of $0.41 to $0.44 and non-GAAP diluted EPS will be in the range of $0.45 to $0.48, which includes $0.03 per diluted share of stock based compensation. For the full year, GAAP diluted EPS is expected to be in the range of $1.87 to $1.91. Raine Radar H-P must be extremely excited with the performance of its new CEO, Mark Hurd, who has led the charge in focusing on the operations of the business and cutting out much of the costs that were holding the company down. They must also be pleased with their decision to hang onto the PC business. Although many analysts believed that after former CEO Carly Fiorina was ousted, the PC group wouldn’t be far behind, it appears that Hurd made the right decision to hang on. Now no. 2 in PCs behind a struggling Dell, H-P is looking great. PCs weren’t the only good news though, as revenue and operating profit increased in nearly every single line of the company’s business. Q & A 1. In terms of PC dynamics the company saw a balance between US and International markets. The company saw a 5% decline in ASPs, which was similar to Q1. The company had double-digit unit growth in every region. 2. The company said that the acquisition of Peregrine Systems Inc. helped the company financially and from a growth perspective, and the company expects that it will continue to drive operational improvements in software. 3. In terms of printing margins and unit growth, the company said that it saw 8% unit growth in the past rolling four quarters. 4. The company was pleased about the unit growth in the IPG segment and expects to accelerate unit growth in the back half of the year. 5. The company felt good about its inventory position and said that it strategically increased inventory in the PSG segment. 6. So far, the company has completed 53% of its proposed head count reductions. 7. On a geographic basis, the company said that it saw a good growth in Eastern Europe, particularly in Russia. 8. The company didn’t expect huge changes in cash flow for the rest of the fiscal year and it expects a little uptake in capital spending. 9. On usage of cash, the company intends to repurchase shares and is also looking for strategic acquisitions in IPG and enterprise storage and servers segments. 10. The company said that unit volume growth and sales coverage provided the leverage for revenue growth in the last six months.