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HP Reports Q3 Results: Digital imaging revenue grows 16%

Press release from the issuing company

PALO ALTO, Calif.--Aug. 19, 2003-- HP today reported financial results for its third fiscal quarter ended July 31, 2003. Third quarter revenue totaled $17.35, compared to $16.54 billion in the prior year period. Revenues increased 5% year-over-year, but declined 4% sequentially reflecting business seasonality. Non-GAAP(1) operating profit totaled $858 million for the quarter, up 61% year-over-year, and down 25% sequentially. Non-GAAP operating profit was 4.9% of revenue, up from 3.2% of revenue in the prior year period, and down from 6.4% in the second quarter. Non-GAAP diluted earnings per share (EPS) was $0.23 for the quarter, up from $0.14 year-over-year, and down from $0.29 sequentially. Non-GAAP diluted EPS and non-GAAP net earnings reflect a $403 million adjustment on an after- tax basis, or $0.13 per diluted share. The pre-tax adjustment includes $376 million of restructuring charges, $141 million in amortization of purchased intangible assets, and $40 million for various acquisition-related items. All non-GAAP financial information in this release is reconciled in the table below titled: "Non-GAAP Consolidated Condensed Statement of Earnings." GAAP operating profit for the quarter was $301 million, or 1.7% of revenue, up from a loss of 15% of revenue in the prior year period and down from 3.6% sequentially. GAAP diluted EPS was $0.10 per share. "The third quarter is always tough, but we still should have done better," said Carly Fiorina, HP chairman and chief executive officer. "Nevertheless, we are confident in our strategy and the actions we're taking. We expect to deliver a strong fourth quarter with every one of our businesses profitable." "Our challenge in the Personal Systems business continues to be desktops, particularly in the U.S., where reduced volumes due to seasonality, and in some cases, our own overly aggressive pricing actions negatively impacted gross margins. We've already taken corrective pricing actions, and will return this business to profitability in Q4. Meanwhile, we continued to widen our market leadership in notebooks, the fastest-growing and most profitable segment of the PC market. Notebooks remained profitable for the quarter, growing revenue 27% year- over-year, faster than our nearest competitor, and gaining 1.4 percentage points of share sequentially. "Imaging and Printing had a good quarter with revenue growth of 10% year-over-year, outpacing competitors. As planned, profit returned to more normal levels, with expenses up 20% year-over-year as we continued to invest in R&D, product rollovers and marketing to extend our leadership in this business. Our recent consumer launch of 158 digital imaging and entertainment products has been extremely well received. "In our enterprise business, it was another strong quarter for Superdome shipments, with revenues up 64% over the same period last year. Unit shipments of industry standard servers grew 16% year-over-year, with a record third quarter in the U.S. and our strongest ever worldwide quarter. HP's performance in mid-range and low- end UNIX servers, however, was weak, as was the company's overall enterprise performance in Europe and Japan. We continued to make good progress on our cost structure, and acted more aggressively to reduce headcount than originally planned. This field restructuring, while the right decision for the long-term and now behind us, had an impact on revenue. The enterprise business will be profitable in Q4. "HP Services performed well during the quarter. Managed services grew 21% year over year, customer support grew 8% year-over-year, and we returned HPS to double-digit profitability during the quarter," said Fiorina. Summary of Financial Results Q3 FY2003 Q3 FY2002 Revenue (billions) $17.35 $16.54 Non-GAAP Operating Margin(1) 4.9% 3.2% GAAP Operating Margin 1.7% (15.0%) Non-GAAP diluted EPS(1) $0.23 $0.14 GAAP diluted EPS $0.10 ($0.67) During the quarter, HP's revenue in the Americas grew 1% to $8.2 billion year-over-year, representing 47% of total revenue. Europe grew 9% to $6.4 billion, representing 37% of total revenue. Asia-Pacific grew 8% to $2.0 billion, representing 11% of total revenue. Japan grew 6% to $740 million in revenue, representing 4% of total revenue. Currency effects contributed seven points to company revenue growth year-over-year. Business Segment Results Personal Systems Personal Systems revenue totaled $4.97 billion in the quarter, up 5% year-over-year, and down 3% sequentially. Units grew 16% year-over-year, fueled by an outstanding performance in notebooks, which grew 54%. According to IDC, HP widened its lead in the notebook market with year-over-year unit growth of 48% in the second calendar quarter, the fourth consecutive quarter of share gains. Strength in notebook and consumer desktop PCs was offset by a double digit year-over-year decline in commercial desktop revenues.(2) Personal Systems reported an operating loss of $56 million in the quarter, compared to a loss of $140 million in the prior year period and a profit of $21 million in the prior quarter. Losses were driven by reduced volumes associated with top line seasonality, lower average unit prices, and higher than expected freight charges to meet flat panel display demand. As a result, operating loss was 1.1% of revenue, down 1.5 percentage points over the prior quarter, but up 1.8 percentage points year-over- year. The notebook business continued to be profitable in the quarter. According to preliminary IDC data, Personal Systems held or gained share in every region. Imaging and Printing Imaging and Printing revenues totaled $5.24 billion in the quarter, an increase of 10% year-over-year, and down 5% sequentially, in line with normal seasonality. Supplies revenue growth continued to outpace competitors with revenues up 16% over the prior year period. Digital imaging revenue grew 16% year-over-year. Business printing hardware increased 6%, while home hardware declined 7%. Imaging and Printing revenue share continued to grow faster than market in all regions, strengthening HP's leadership position in key categories around the world. Operating profit was $739 million, or 14.1% of revenue, returning to more normal levels compared to 17.9% in the prior year and 16.6% last quarter. Operating profit declined as a result of top line seasonality, product transition costs, and increased marketing and sales investments to further extend HP's market leadership. Enterprise Systems Enterprise systems revenue was $3.71 billion, essentially flat year-over-year, and down 4% sequentially. Operating losses for the quarter grew to $70 million, up from a loss of $7 million in the prior quarter, but an improvement of $252 million over the prior year period. Operating losses increased sequentially due in part to business seasonality and top line weakness in addition to planned expenses related to HP's Integrity server launch, investments in management software, and the acceleration of HP's Alpha processor transition. The group's operating loss was 1.9% of revenue, compared to a loss of 0.2% last quarter and a loss of 8.7% in the prior year period. Enterprise systems had record unit shipments in its ProLiant server and StorageWorks EVA disk storage systems and record Superdome revenue during the quarter. According to the latest IDC market share data, HP held its #1 position worldwide in UNIX, storage and industry standard server revenue share.(3) Industry standard server revenue was up 4% year-over-year, 16% in unit volumes, driven by strong growth in Windows and Linux systems. Business Critical Systems revenue was down 8% year-over- year, down 5% sequentially, driven by volume declines in mid-range and low-end UNIX. Storage was up 6% year-over- year, down 8% sequentially, with particular strength in disk storage systems. Software revenue was down 8% year- over-year, up 6% sequentially, with OpenView revenue up year-over-year. Services HP Services revenue was $3.08 billion, up 5% year-over- year and 2% sequentially. Growth was led by managed services, which reported revenue gains of 21% year-over- year. Customer support revenue was up 8% year-over-year on improvement in support renewals, attach rates, and integrated support services. Revenue in consulting and integration was down 15% year-over-year due to project deferrals and continued overcapacity in the consulting market. HP Services posted an operating profit of $337 million, or 10.9% of revenue, an increase of 1 percentage point over second quarter and 1.5 percentage points over the prior year period, fueled by restructuring actions and stronger top line performance. Financial Services Revenue was $442 million, down 13% year-over-year and down 12% sequentially. Operating profit was $18 million for the quarter, versus a loss of $21 million in the prior year period and profit of $21 million in the second quarter. Operating profit was 4.1% of revenue, compared to 4.2% in the second quarter and a loss of 4.1% in the prior year period. Asset Management HP exited the quarter with $13.4 billion in gross cash, which includes cash and cash equivalents of $12.9 billion and short- and certain long-term investments of $500 million. Cash generated from operations for the quarter was $468 million after approximately $400 million in restructuring charges, nearly $300 million in retention payments, $260 million in first-half performance and sales bonuses, and $265 million in retirement funding during the quarter. Inventory ended the quarter at $6.1 billion, a sequential increase of $399 million, reflecting normal build-up in advance of the back-to- school selling season. Trade receivables decreased $271 million from the prior quarter to $7.6 billion. HP's dividend payment of $0.08 per share in the third quarter resulted in a cash use of $244 million. In addition, HP repurchased $203 million of stock. Outlook For the fourth fiscal quarter 2003, HP estimates revenues will grow between 8% and 10% sequentially or $18.8 billion to $19.1 billion with non-GAAP EPS of $0.34 to $0.36, which assumes after-tax exclusion for charges in the fourth quarter totaling approximately $0.05 to $0.07 per share from amortization of purchased intangible assets, restructuring, and acquisition-related charges.