INDUSTRY

HP today announced financial results for its second fiscal quarter ended April 30, 2007, with net revenue of $25.5 billion, representing growth of 13% year-over-year, or 10% when adjusted for the effects of currency. GAAP operating profit was $2.1 billion and GAAP diluted earnings per share (EPS) was $0.65 per share, down from $0.66 in the prior year period and up 27% excluding a $0.15 tax settlement gain recorded in the prior year period. Non-GAAP operating profit was $2.3 billion, with non-GAAP diluted EPS of $0.70, up from $0.69 in the prior year period and up 30% excluding the $0.15 tax settlement gain. Non-GAAP financial information excludes $145 million of adjustments on an after-tax basis, or $0.05 per diluted share, related primarily to restructuring charges and amortization of purchased intangibles, and offset partially by a pension curtailment gain resulting from changes to the company's U.S. defined benefit pension plan. GAAP and non-GAAP financial information include all stock-based compensation expense in both current and prior year periods. "This was a strong performance for HP," said Mark Hurd, HP chairman and chief executive officer. "We generated $3 billion of revenue growth, continued to expand earnings and achieved record cash flow from operations. While we still have considerable work ahead of us, I am confident we can continue to execute with discipline and deliver strong financial returns." During the quarter, on a year-over-year basis, revenue in the Americas grew 11% to $10.7 billion, revenue in Europe, the Middle East and Africa grew 14% to $10.3 billion, and revenue in Asia Pacific grew 16% to $4.5 billion. When adjusted for the effects of currency, revenue in the Americas grew 11%, revenue in Europe, the Middle East and Africa grew 7%, and revenue in Asia Pacific grew 13%. Personal Systems Group Personal Systems Group (PSG) revenue grew 24% year-over-year to $8.7 billion, with unit shipments up 30% on a year-over-year basis. Notebook revenue grew 45% over the prior year period, while desktop revenue grew 9%. Commercial client revenue grew 13% year-over-year, while Consumer client revenue increased 41%. Operating profit was $417 million, or 4.8% of revenue, up from a profit of $248 million, or 3.6% of revenue, in the prior year period. Imaging and Printing Group Imaging and Printing Group (IPG) revenue grew 6% year-over-year to $7.2 billion. On a year-over-year basis, supplies revenue grew 10%, commercial hardware revenue grew 3% and consumer hardware revenue declined 2%. Printer unit shipments increased 11% year-over-year, with consumer printer hardware units up 7% and commercial printer hardware units up 21%. Momentum in key growth initiatives continued, with printer-based multi-function printers up 40%, and color laser printers up 19%. HP Indigo Press printed page volume grew 43% over the prior year period. Operating profit was $1.2 billion, or 16.3% of revenue, up from a profit of $1.0 billion, or 15.5% of revenue, in the prior year period. Enterprise Storage and Servers Enterprise Storage and Servers (ESS) reported revenue of $4.6 billion, up 8% over the prior year period. On a year-over-year basis, industry-standard server revenue increased 17%, with blade revenue up 58%. Storage revenue grew 1%, with revenue growth of 10% in the midrange EVA line offset by declines in the high-end array and tape businesses. Business critical systems revenue declined 6%, with Integrity systems growth of 60% offset by declines in PA-RISC and Alpha. Operating profit was $407 million, or 8.8% of revenue, up from a profit of $322 million, or 7.5% of revenue, in the prior year period. HP Services HP Services (HPS) revenue increased 7% year-over-year to $4.1 billion. Revenue in Technology Services grew 3% over the prior year period, while Consulting and Integration revenue rose 8% and Outsourcing Services revenue rose 12%. Operating profit was $459 million, or 11.1% of revenue, up from a profit of $345 million, or 8.9% of revenue, in the prior year period. HP Software HP Software revenue grew 58% over the prior year period to $523 million, led by strong growth from the businesses acquired in HP's purchase of Mercury Interactive. On a year-over-year basis, HP OpenView grew 6% excluding Mercury, and HP OpenCall declined 13%. Operating profit was $42 million, or 8.0% of revenue, up from a profit of $3 million, or 0.9% of revenue, in the prior year period. Financial Services HP Financial Services (HPFS) reported revenue of $550 million, an increase of 6% year-over-year. Financing volume and net portfolio assets increased 8% and 6% respectively, over the prior year period. Operating profit was $36 million, or 6.5% of revenue, down from a profit of $39 million, or 7.5% of revenue, in the prior year period. Asset management HP generated $4.2 billion in cash flow from operations. Inventory ended the quarter at $7.3 billion, down $1.1 billion sequentially and up $510 million year-over-year. Accounts receivable increased $1.2 billion sequentially and increased $1.8 billion over the prior year period to $11.6 billion. Accounts payable increased $145 million sequentially and grew $1.4 billion over the prior year period to $11.5 billion. HP's dividend payment of $0.08 per share in the second quarter resulted in cash usage of $213 million. During the quarter, HP repurchased $2.2 billion of shares in the open market and completed the prepaid variable share purchase program with the receipt of the final 6 million shares. In addition, HP entered into an accelerated share repurchase program for $1.8 billion. In total, approximately 100 million shares were acquired during the quarter. HP exited the quarter with $12.3 billion in gross cash, which includes cash and cash equivalents of $12.2 billion, short-term investments of $74 million, and certain long-term investments of $23 million. Outlook HP estimates Q3 FY07 revenue will be approximately $23.7 billion to $23.9 billion. Third quarter FY07 GAAP diluted EPS is expected to be in the range of $0.60 to $0.61, and non-GAAP diluted EPS is expected to be in the range of $0.64 to $0.65. Non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.04 per share, related primarily to the amortization of purchased intangible assets. HP estimates FY07 revenue will be approximately $100.5 billion to $100.9 billion. FY07 GAAP diluted EPS is expected to be in the range of $2.51 to $2.53, and FY07 non-GAAP diluted EPS is expected to be in the range of $2.75 to $2.77. FY07 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.24 per share, related primarily to the amortization of purchased intangible assets, in process research and development charges, restructuring charges and pension curtailment gains. More information on HP's quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP's Investor Relations website at its Web site. HP's Q2 FY07 earnings conference call is accessible via an audio webcast at its Web site.