Overseas Markets Drive H-P Profit

CEO Hurd calls its U.S. business 'spotty.'
Author:
Publish date:

Updated from May 20

Hewlett-Packard

(HPQ) - Get Report

grew its bottom line 16% in its fiscal second quarter, as the company's foothold in overseas markets offset weakness in the U.S.

The results were no surprise: H-P preannounced its financial results last week, along with news that it struck a

$13.9 billion deal to acquire

technology consulting company

EDS

(EDS)

.

Shares of Hewlett-Packard opened at $46.20 on Wednesday morning.

Palo Alto, Calif.-based H-P said Tuesday that it benefited from strong demand in emerging economies such as Brazil, Russia, India and China, where the company's overall pool of revenue was up 26% year-over-year.

But H-P's sales in the U.S. were flat compared to this time last year, representing the slowest growth on its home turf in at least two years.

In a post-earnings conference call, CEO Mark Hurd described the U.S. market as "spotty" during the quarter, with demand varying by industry and by product type.

"It's just a mixed bag," said Hurd. "There's good numbers in there. And there's some numbers we wished were better."

A weakening U.S. economy, weighed down by the housing market and the financial credit crunch, has caused concern that consumer and corporate spending on technology products will dry up.

H-P, which generates 70% of its sales outside the U.S., is better positioned to withstand a U.S. slowdown than some of its competitors, such as

Dell

(DELL) - Get Report

.

For the three months ended April 30, H-P had revenue of $28.3 billion, up from $25.5 billion at this time last year.

H-P said sales growth was driven by strength across its various business groups, with notebook sales up 31% year-over-year and software revenue up 28%.

Printing and imaging, H-P's most profitable business, saw revenue increase 6% year-over-year to $7.6 billion.

One weak spot was sales of industry-standard servers that feature off-the-shelf microprocessors made by

Intel

(INTC) - Get Report

and

AMD

(AMD) - Get Report

, which posted flat revenue growth year-over-year. That's well below its recent performance -- in the past four quarters, H-P's industry-standard server revenue growth has ranged from 11.9% to 16.7%.

Hurd said that particularly strong server sales at this time last year made the most recent quarter's numbers suffer by comparison. He added that H-P had also missed a couple of deals this quarter, which contributed to the flat server sales.

H-P had net income of $2.1 billion, or 80 cents a share, vs. $1.8 billion, or 65 cents a share in the year-ago period.

Excluding various charges related to the amortization of purchased intangibles, H-P said it earned 87 cents a share, in line with its pre-announcement.

H-P's operating profit margin increased to 9.2% vs. 8.3% at this time last year. And the company generated a record $4.8 billion in cash flow from operations.

Cathie Lesjak, H-P's finance chief, said revenue in the current quarter is expected to be in line with typical seasonal patterns. But she noted that H-P expects prices for components used in its products to be less favorable than they have been during the past few quarters.

H-P forecast sales between $27.3 billion and $27.4 billion, with adjusted EPS between 82 cents and 83 cents in the current quarter. The average analyst estimate calls for EPS of 82 cents on sales of $27.3 billion in the current quarter.

H-P's stock has declined more than 5% since news of the EDS acquisition first surfaced last week, on investor concerns that EDS's profit margins and slow sales growth make it a poor acquisition choice for H-P.

Hurd said Tuesday the deal will give H-P better reach into key corporate accounts. And he reiterated H-P's belief that it can make EDS run leaner and meaner under the H-P flag, with a goal of "materially" improving the profit margin of the combined outsourcing businesses.

"Cost opportunities take many forms," Hurd said. "But make no mistake, we will get the cost right."