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HP’s Stunning Turnaround

Posted on Monday, Oct 15th 2007

As per a recent Forrester report, 1 billion PCs will be in use by the end of 2008 and 2 billion by 2015. With the increasing trend toward convergence devices, a majority of the next billion PCs will be convergence devices.

In this post, I will look at HP, a company that has not only engineered an incredible turnaround under the no-nonsense leadership of CEO Mark Hurd, but has managed to show growth and sustainability in markets that competitors like IBM have exited under pressure from China.

Hewlett Packard Co (NYSE:HPQ) is a leading global technology company with revenues of $91.7 billion, 156,000 employees, and portfolio of over 30,000 patents in 2006. Apart from PCs, HP is also the leader in the disk storage systems with a market share of 20.6% followed closely by IBM with 19.3%. Its operations are organized into seven segments: Enterprise Storage and Servers (ESS), HP Services (HPS), HP Software, Personal Systems Group (PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS), and Corporate Investments. It has a broad portfolio that ranges from PCs and handhelds to imaging and printing devices to storage and servers.

HP is the number 2 vendor in the handheld market. With the decline in demand for PDAs, HP is transitioning to travel companions and converged handhelds with multimedia and GPS features.

HP Software is the leader in distributed system management software market segment and its position is boosted by the $4.9 billion acquisition of Mercury Interactive, an IT management software and services company in November, 2006. The acquisition will combine Mercury’s Business Technology Optimization (BTO) solutions and messaging with HP Software’s enterprise management software.

HP is also capitalizing on the online video trend through its telepresence solution, HP Halo and its networking arm, ProCurve. According to a recent report by market research firm Dell’Oro Group, ProCurve port shipments grew by 46 % in the Q2 2007 over Q2 2006 while the year-over-year industry growth rate was 21 %. Its Power over Ethernet (PoE) shipments grew 249 % year over year compared to market growth of 60 %. ProCurve is now No. 2 in the PoE industry with 10 % market share. It is also the No. 2 vendor in Layer 2 and Layer 3 total Gigabit and 10 Gigabit ports.

On the financial front, HP reported net revenue of $25.4 billion for Q3 2007, a growth of 16% year over year. GAAP operating profit was $2.1 billion and GAAP diluted earnings per share (EPS) was $0.66, up from $0.48 in the prior-year period. HP bought back 55 million shares for $2.5 billion in Q3 2007. 16% is a spectacular growth rate for a company of the size of HP!

Segment wise, PSG revenue grew 29% year over year to $8.9 billion. IPG revenue grew 8% year over year to $6.8 billion. ESS grew 10% year over year to $4.5 billion. HPS revenue was $4.2 billion, up 8% year over year. HP Software revenue grew a whopping 74% year over year to $554 million, primarily due to its $4.9 billion acquisition of Mercury Interactive in November 2006. HPFS reported revenue of $582 million, up 12% year over year. The majority of the revenue in Corporate Investments accounts for the revenue from ProCurve. Revenue from network infrastructure products grew 38% over Q3 2006 due to increased sales of gigabit Ethernet switch products.

For Q4 FY07, the results of which will be announced on 19 Nov, HP estimates revenue to be around $27.0 billion to $27.2 billion and GAAP diluted EPS to be in the range of $0.75 to $0.76.

As part of its cost cutting plans, HP announced in 2006 its plan to consolidate 85 data centers into six state-of-the-art centers in three U.S. cities. It is reinvesting these savings in expanding its sales force for aggressively building its market share in the emerging markets. In 2005, it started implementing a restructuring plan that would eliminate approximately 15,200 employees over a period of two years. In August 2007, it acquired SPI Dynamics, a provider of web application security assessment solutions. It followed this up by acquiring Opsware in September and Neoware in October. Its stock is currently trading around $52 and its market cap is $134.14 billion. Unbelievable!

Hewlett-Packard Co. (HPQ)

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All very well, but what’s your price target for the stock?

Thanks

Henry Pope Monday, October 15, 2007 at 9:39 PM PT

Henry,

To be honest, we have just started coverage on HP, and have not done any price-target analysis. We don’t have the infrastructure at this point to do valuation modeling.

The discussion above is an analysis of whether HP is aligned with some of the major market trends, and the answer is, it is.

That should drive growth.

I am a big fan of companies that are aligned with strong market trends, are well-run operationally, have great leadership teams, and can sustain the growth.

All I can say is that HP is such a company.

It is also doing a very nice job of acquiring and integrating strategic businesses that accelerate growth.

Sramana

Sramana Mitra Tuesday, October 16, 2007 at 9:11 AM PT

“Enterprise Storage and Servers (ESS), HP Services (HPS), HP Software, Personal Systems Group (PSG), the Imaging and Printing Group (IPG), HP Financial Services (HPFS), and Corporate Investments. It has a broad portfolio that r”… what about Technology Services Group (TSG)?

san Tuesday, October 16, 2007 at 9:02 PM PT

[…] for this stunning turnaround goes to its CEO Mike Hurd who has cut around 15,000 jobs since taking over in 2005 and expanded into […]

HP Looks Recession Proof - Sramana Mitra on Strategy Thursday, January 17, 2008 at 6:44 PM PT

[…] In my last post on HP, I looked at how its acquisition of technology services firm EDS could place it in a challenger position behind IBM. In this post, we will look at both companies’ recent performances.Yesterday, Hewlett-Packard (HPQ) reported solid Q3 results that beat analyst estimates. Revenue was up 10% to $28 billion versus Street estimates of $27.4 billion. Profit was up 14% to $2 billion or $0.80 per share. Non-GAAP EPS was $0.86 versus Street estimates of $0.83. Suggested reading: HP’s Stunning Turnaround. […]

True Blue Chips: HP and IBM - Sramana Mitra on Strategy Wednesday, August 20, 2008 at 9:02 AM PT