HP Profit Jumps As IT Spending Rises

Net income jumps 5% on an 8% revenue increase, but software sales lag.

Antone Gonsalves, Contributor

November 23, 2010

3 Min Read

Hewlett-Packard has reported a 5% increase in profits in the fourth fiscal quarter on a revenue increase from a rise in IT spending by businesses.

The computer maker, which released earnings Monday for the quarter ended Oct. 31, said net income grew to $2.54 billion, or $1.13 a share, from $2.41 billion, or $1.02 a share, the same period a year ago. Revenue rose 8%, to $33.28 billion from $30.78 billion.

HP benefited from increased spending by enterprises on storage and servers. Revenue from that segment jumped 25% year over year, to $5.3 billion. HP rival Dell this month also reported strong revenue increases driven by higher spending by businesses.

Also like Dell, HP reported weaker sales in consumer PCs. Sales from HP's Personal Systems Group, which includes laptops and desktops, increased 4% overall, to $10.3 billion. However, revenue from consumer PCs alone fell 10% year over year, HP said. Printer sales, including supplies, rose 8% in the quarter, to $7 billion.

The one area where some analysts expect to see improvement in the future is in software sales. HP said revenue from software in the quarter increased about 1%, to $974 million. HP recently hired Leo Apotheker, former CEO of business software maker SAP, as its chief executive. Given Apotheker's experience and HP's recent software acquisitions, including ArcSight, Fortify and Stratavia, the company is expected to focus on raising software revenues.

"HP is aware of the untapped potential its software division can provide to support growth while still adding value to its other segments, evident by the rapid software acquisitions and the appointment of former SAP CEO Leo Apotheker," Jessica Breen, analyst for Technology Business Research, said in a commentary following HP earnings. "HP Software will likely begin to explore software opportunities across 2011. However, TBR does not expect to see a quick change in HP Software’s growth trajectory."

While HP beat Wall Street's year-over-year revenue estimates, the company reported only an 8% increase from the third fiscal quarter, which was less than the 12% average quarter to quarter increase, Brian White, financial analyst for Ticonderoga Securities, said.

While HP's quarter-to-quarter sales has slowed, IT hardware vendors Cisco, Dell and Brocade in the last two weeks have provided weaker-than-expected revenue outlooks for the January quarter. In addition, NetApp's revenue forecast was only in line with expectations.

"The slowing upside momentum at HP and NetApp, combined with disappointing outlooks from Cisco, Dell and Brocade, tells us that the upside in the tech supply chain will become more difficult over the next few quarters," White said in a research note. "The January quarter sales outlooks for these five companies in aggregate totaled $60.47 billion, below the (Wall) Street estimate of $61.94 billion by 2.4%, or $1.47 billion, highlighting deteriorating demand as we exit the year."

For the current first fiscal quarter, HP predicts revenue of $32.8 billion to $33 billion and earnings per share of $1.06 to $1.08. Wall Street's average revenue estimate for the quarter is $32.7 billion, according to Thomson Reuters.


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