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Thanks to a combination of improving product sales -- particularly in a resurgent enterprise server market -- and service contracts, Hewlett-Packard (NYSE: HPQ) reported revenue and earnings that beat Wall Street projections.
For its second fiscal quarter ended April 30, HP posted non-GAAP income of $1.09 per share on revenue was $30.8 billion, handily beating Thomson-Reuters analyst consensus of earnings of $1.05 per share and revenue of $29.7 billion. GAAP income, which includes one-time charges, was $2.2 billion, or $0.91 per share. Revenue rose $12.4 billion from the same period last year and income was up 29.4 percent.
Returning interest among IT decision-makers in replacing their aging systems proved one major reason for HP's successful quarter, continuing a reversal of the past several months' virtual standstill in IT spending.
"After many customers deferred hardware purchases in 2009, we're seeing strong growth in a number of areas," HP Chairman and CEO Mark Hurd said during the company's earnings call with Wall Street analysts.
The rise in revenue can also be attributed in part to a much stronger dollar and a healthy increase in sales overseas. Revenue in the Americas and the Europe, the Middle East and Africa (EMEA) region were both up 11 percent and Asia Pacific rose 19 percent. Two-thirds of revenue came from outside the U.S.
That's in spite of concerns about Europe's economic instability, particularly in Greece.
"We saw the demand picture improve in Europe, and it wasn't just across five or six countries, it was across all countries and all segments," Hurd said. "So it was very broad-based for us. It's behavior relative to what we've seen in America and Asia."
IT services revenue increased 2 percent, while outsourcing revenue rose 6 percent. HP's technology services and business process outsourcing were flat year over year, and application services revenue declined 2 percent.
Seeing IT services flat from a year earlier came as something of a surprise, since it was such a strong component last year. Hurd said HP has been spending a lot of time continuing its integration of EDSand getting it aligned with the rest of the company.
"We expect to have very strong signings this year. When you look at our pipeline, we feel very strong about where the business is at. We've improved profitability, improved the cost structure," Hurd said.
IT buyers' interest in servers on the upswing
Enterprise Storage and Servers (ESS) revenue jumped 31 percent, indicating that the long, painful decline in server sales has finally ended, or at least temporarily halted, while the Personal Systems Group (PSG) -- HP's PC division -- reported a 21 percent revenue increase, thanks in part to a 20 percent year-over-year increase in unit shipments.
The growth here was led by a surge in the workstation market, which rose 47 percent, according to HP CFO Cathie Lesjak. "That market includes financial services, who are often early adopters, and more SMB in the commercial space," she said on the call. "We always thought it would start with consumers, then SMB, and then corporate."
Nevertheless, Hurd said HP is not expecting a big wave of hardware refreshes just yet.
"We have seen some improvements in some areas, mostly in quicker times to make decisions by customers," he said. "If there is a spike, given the things we're describing, it would be good news."
HP Software revenue declined 1 percent, while HP's Imaging and Printing Group (IPG) increased 8 percent.
Printer sales, in particular, rose 9 percent, and HP said it could have sold even more -- but was hit with a supply shortage.
"Demand picked up more than we expected in the quarter," Lesjak said. "That's bad news because we couldn't meet capacity. We have a very strong backlog of orders." But she added that the unit decline in parts had not been a surprise to HP, and the back half of the year will be much stronger for laser printers.
For the third quarter of fiscal 2010, HP estimates revenue will be approximately $29.7 billion to $30.0 billion, with GAAP earnings in the range of $0.87 to $0.89 per share and non-GAAP per-share earnings between $1.05 and $1.07. HP expects full-year fiscal 2010 revenue growth of approximately 8 to 9 percent, with GAAP earnings per share (EPS) down $0.03 to $0.06 for the year but non-GAAP EPS up $0.06 to $0.08.
So far, HP's estimates appear to be taking a hit because it is recognizing expected stock dilution from the acquisition of Palmbut has not realized any income from the embattled mobile device pioneer yet.
Meanwhile, another acquisition may be closer to paying off: The company's networking division is growing fast, thanks to HP's rapid integration of 3Com, a purchase on which it closed earlier this month. Networking sales were up 58 percent year over year and 3Com integration is already under way.
"We've started ramping hiring, we had a number of significant wins and had a strong Virtual Connect quarter. Our networking strategy isn't a 3Com strategy, it's not a ProCurve strategy, it's all those capabilities brought together," Hurd said.
Hurd also shed some light on where HP stands on tablet PCs, in the wake of the breakthrough success of the Apple iPad but HP's shelving last month of a tablet design of its own.
"We think there is a market there and we expect to be a participant in that market," Hurd said. "We've never felt like the market was one product or one developer [who] would become ubiquitous. We expect to play across that gamut of capabilities."
Update adds comments by Hurd and Lesjak.