Hewlett-Packard Tops Earnings Estimates: Summary of Q3 Earnings Call September 1, 2006 -- Hewlett-Packard Co. (NYSE: H-PQ) announced its financial results for the third quarter ended July 31, 2006 recently. Revenue was $21.9 billion, up 5% year-over-year, or 6% when adjusted for the effects of currency. GAAP operating profit was $1.5 billion and GAAP diluted earnings per share was $0.48 per share, up from $0.03 in the prior year period. GAAP results include $108 million of adjustments on an after-tax basis, or $0.04 per diluted share, related primarily to the amortization of purchased intangibles. Contents of this Summary * Quarter Highlights * Segment Performance * Guidance * Raine Radar * Q & A Quarter Highlights • Cash flow from the third quarter operations was $2.6 billion. • The Board of Directors approved $6 billion for share repurchase. • During the quarter, on a year-over-year basis, revenue in the Americas grew 8% to $9.7 billion, revenue in Europe, the Middle East and Africa grew 2% to $8.4 billion, and revenue in Asia Pacific grew 7% to $3.8 billion. When adjusted for the effects of currency, revenue in the Americas grew 7%, revenue in Europe, the Middle East and Africa grew 3%, and revenue in Asia Pacific grew 8%. • GAAP operating margin for the third quarter was 6.9%, compared to 4.4% in the third quarter of last year. • Depreciation expense in the third quarter was $219 million compared to $191 million in the same period a year ago. Segment Performance Personal Systems Segment Personal Systems Group revenue grew 8% year-over-year to $6.9 billion, with unit shipments up 14%. On a year-over-year basis, desktop revenue increased 5% and notebook revenue grew 14%. Commercial client revenue grew 4% year-over-year, while consumer client revenue increased 17%. Operating profit was $275 million, or 4.0% of revenue, up from a profit of $163 million, or 2.6% of revenue, in the prior year period. Imaging and Printing Segment Imaging and Printing Group revenue grew 5% year-over-year to $6.2 billion. On a year-over-year basis, supplies revenue grew 9%, commercial hardware revenue grew 3% and consumer hardware revenue declined 3%. Printer unit shipments increased 15% year-over-year, with consumer printer hardware units up 13% and commercial printer hardware units up 23%. Momentum in key growth initiatives continued, with all-in-one unit shipments up 17% year-over-year, color laser printer shipments up 70% and printer-based MFP shipments up 196%. H-P Indigo Press printed page volume grew 37% over the prior year period. Operating profit was $884 million, or 14.2% of revenue, up from a profit of $771 million, or 13.0% of revenue, in the prior year period. Enterprise Storage and Servers Segment Enterprise storage and servers reported revenue of $4.1 billion, up 3% over the prior year period. On a year-over-year basis, industry-standard server revenue increased 6%, with blade revenue growth of 37%. Networked storage revenue grew 5%, led by continued strength in external arrays, where high-end XP revenue grew 19% and revenue in the mid-range EVA line increased 17%. Business critical systems revenue declined 6%, as Integrity systems growth of 76% was offset by declines in PA-RISC and Alpha. Operating profit was $296 million, or 7.2% of revenue, up from a profit of $147 million, or 3.7% of revenue, in the prior year period. H-P Services Segment H-P Services revenue increased 1% year-over-year to $3.9 billion. On a year-over-year basis, revenue in technology services declined 1%, consulting and integration revenue increased 3% and managed services revenue grew 9%. Excluding the effects of currency, services revenue grew 2% year-over-year. Operating profit was $364 million, or 9.4% of revenue, up from a profit of $256 million, or 6.7% of revenue, in the prior year period. Software Segment Software revenue was $318 million, an increase of 30% year-over-year, with revenue in H-P OpenView and H-P OpenCall increasing 34% and 21%, respectively. Operating profit was $13 million, or 4.1% of revenue, compared with a loss of $37 million in the prior year period. On July 25, H-P announced that it had signed a definitive agreement to purchase Mercury Interactive Corp., a leading IT management software and services company, which is expected to close in the fourth calendar quarter of 2006. Financial Services H-P Financial Services (H-PFS) reported revenue of $519 million, an increase of 6% year-over-year. Financing volume increased 10% over the prior year period, and net portfolio assets grew 4%. Operating profit was $35 million, or 6.7% of revenue, down from a profit of $58 million, or 11.9% of revenue, in the prior year period. Guidance H-P estimates fourth quarter revenue to be approximately $24.1 billion. Fourth quarter GAAP diluted EPS is expected to be in the range of $0.57 to $0.59, and non-GAAP diluted EPS is expected to be in the range of $0.61 to $0.63. Full year GAAP diluted EPS is expected to be in the range of $2.14 to $2.16, and full year FY06 non-GAAP diluted EPS is expected to be in the range of $2.31 to $2.33. Raine Radar H-P had an exceptionally strong quarter, beating earnings expectations and seeing substantial profit gains across all lines of business except financial services, where there was a decrease. The continued growth of H-P’s personal systems group, driven by increased sales in laptops, has proven just what a fierce competitor they are to Dell. The software and services segments are also continuing to show solid growth and improved profitability. The printing group also saw increased revenue, driven mostly by consumables, but equipment sales were a little soft this quarter. Q & A 1. H-P announced that it has signed a definitive agreement to purchase Mercury Interactive Corp., a leading IT management software and services company, through a cash tender offer for $52.00 per share, or an enterprise value of approximately $4.5 billion, which is net of existing cash and debt. 2. Total operating profits for the quarter were $884 million, 14.2% of revenue. This was primarily due to increased revenues in all segments of the business. 3. H-P is targeting to decrease the work force by 15,300 by the end of the fourth quarter 2006. They feel that they are in line to complete this as planned. 4. From a growth perspective, H-P believes that they can compete if they optimize cost structures and make good investments. Their goal is to keep up their growth they want by good revenue in the segments that they compete. 5. In the services area the company plans to grow by acquisitions rather than forming its own internal subs from within.