HP's Fortunes Rise, Undaunted by Scandal

Under the helm of Carly Fiorina, the question looming over HP centered around profitability, and where the company would find it after its merger with Compaq. While there apparently were apparently boardroom shenanigans - which Fiorina discusses in her latest book - investors', analysts', and journalists' attention was focused primarily on whether a lady could not only run a high-profile institution previously understood to be a men's club, but could take the heat if her biggest gamble didn't pay off.

Now that current HP CEO - and newly appointed chairman - Mark Hurd has effectively picked up the pieces after the Compaq merger and re-assembled the company, very little attention is being paid to his character or personality. Judging from today's fiscal fourth quarter earnings report, you'd think the fact that his corporate conduct is under question - more so than Fiorina's ever was - didn't really matter, as long as earnings per share continued to rise.

Which it has, in stellar fashion. The company posted one of its best performing quarters in years, and a star quarter even for a company that hadn't been heading south just two years ago. The company posted $24.55 billion in revenue, earning $2.2 billion - a full 9% of that amount - in profit. In any segment of the electronics industry, 9% margins are quite healthy. At this time last year, HP posted $22.9 billion in revenue, with margins of 7.6%. Earnings per share this quarter reached $0.68, which was $0.04 higher than street estimates, and $0.14 higher than one year ago.

Hurd called this one of HP's most balanced quarters in years. What he means is that all the company's divisions are starting to take on more equivalent weight. During the leaner years, HP relied on its Imaging and Printing Group (IPG) division to get it through. Even though HP loses money on printers sold, investors know the company is actually in the ink business - where its highest margins can be attained. (Ink is almost as good as software in that respect.) This last quarter, IPG did not disappoint, earning $7.3 billion in revenue, gaining 7% over the prior year's Q4. The payoff here, though, comes in the form of a nearly $1.1 billion profit, representing a 14.8% margin. All ink for HP is green.

Not that the printer business is doing all that badly - in fact, it's phenomenal, reversing most of its downtrend against Epson. As HP Chief Financial Officer Bob Wayman stated Thursday afternoon, revenues from sales of consumer printers has risen about 60% annually, and color laser printer business is rising nicely as well. But the low margins on those products helps pull down IPG's overall margin to 14.8%.

But the division that IPG's fortunes generally compensated for has now picked itself up, and is marching right along. This quarter, the Personal Systems Group (PSG) - which makes all those PCs you read about - actually exceeded IPG in revenue, taking in $7.82 billion. Margins in the PC business, however, aren't like those to be found in the inkwell. After costs are deducted, PSG earned $336 million, representing a margin of 4.3%.

Shouldn't the plummeting prices for CPUs from both Intel and AMD have helped HP improve its margins in PC sales? You'd think so, but another factor worked against it: "Certainly we did see memory pricing pressures and availability issues in Q4," Wayman told one analyst. "We did pay a little more for memory than we had planned going into the quarter, in a couple of our businesses. So memory has been the commodity of interest in Q4." The plummeting price of LCD panels, though, helped balance out the rising cost of memory, he added.

Recent analyst reports show a downturn in the growth rate for the PC market overall, with the brunt of that downturn being felt in the commercial sector. CEO Hurd wasn't willing to break down the PC business into segments, though he did point out that HP had regained the #1 spot in Gartner's list of worldwide PC suppliers. (Dell was bumped down to #2 worldwide, though it retains the #1 slot for the US market.)

"We saw pretty stable demand," Hurd stated, not offering much more detail except this: "Our real issue in the quarter, if anything, on the supply side, was in memory...We paid up a little bit for memory. I wish we hadn't, but we did."

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