HP Poised to Unseat IBM

In its fourth quarter, Hewlett-Packard's business divisions pulled together to deliver solid revenue and profit growth. Watch out, Big Blue

by Peter Burrows

Hewlett-Packard (HPQ) has taken a big step toward laying official claim to the title of world's biggest tech company. On Nov. 16 the Palo Alto (Calif.) company reported fourth-quarter earnings that, thanks to all its business units performing well, exceed the annual sales IBM (IBM) is expected to post in its fourth quarter, which ends Dec. 31. "This has been a defining year for HP," a buoyant Chief Executive Mark Hurd told reporters during a conference call. And no, he wasn't referring to the pretexting scandal that dominated headlines earlier this fall.

Instead, Hurd was discussing fourth-quarter results that put to rest many of the questions that have dogged HP in recent years. For the past decade, investors and industry analysts have wondered whether the company had become too diverse to be manageable. For a lot of those years, nearly all of the company's profits came from its printer business—or more specifically, its hugely profitable ink cartridge business. But this quarter, all of the company's main businesses more than pulled their weight.

Balanced Performance

Even HP's inconsistent corporate computing arm, a frequent money-loser in the past, delivered a 42% increase in operating profits, on 4% revenue growth, to $4.7 billion for the quarter. And two of HP's historic weak spots—PCs and software—showed impressive gains. The PC unit recorded revenue growth of 10%, while sales for the software unit grew 14% for the quarter. Says Hurd: "This was one of the most balanced financial performances we've delivered in a long time."

The result is a company on a roll. Overall revenues grew 7.2%, to $24.6 billion for the quarter, impressive for a company the size of HP. For the year, HP pulled in sales of $91.7 billion, a 6% increase. That's a smidgen ahead of IBM's projected annual sales, making HP tech's biggest player. HP generated $11.4 billion in cash for the year, up from $3.3 billion the year before. That leaves it with $16.4 billion in cash, up from $13.9 billion at the end of the previous year.

Hurd raised HP earnings targets for the first fiscal quarter of 2007, making it the fourth time in the past five quarters he has done so. HP now expects first-quarter sales to be around $24.2 billion, with full-year 2007 sales expected to come in at $97 billion, or 5.7% higher than fiscal 2006.

Servers and Laptops

HP is positioned to take advantage of some the biggest growth opportunities in the technology sector. While its sales of high-end storage gear and servers based on old proprietary technologies are slumping, the company is doing fine selling the kind of "industry-standard" servers that most corporate buyers prefer because they're less expensive and more energy-efficient. By coupling these servers—particularly the fast-growing segment for so-called blade servers that can be packed like so many books into a single rack—with its storage, services, and software, the company looks poised to become a more credible soup-to-nuts rival to IBM for the biggest corporate deals. That's particularly true if HP can successful integrate the operations of recently acquired Mercury Interactive (see BusinessWeek.com, 7/29/06, "Mercury's Star Rises"). Technology Business Research analyst John Spooner says that "HP's server business is firing on all cylinders and the company may have gained blade share from rival IBM."

The most impressive turnaround may well be in the company's huge PC unit, the Personal Systems Group. Sales for the quarter grew 10%, to $7.8 billion. Such double-digit growth stands up well against long-time rival Dell (DELL), which is expected to boost sales just 4.3% in its fiscal year ending Jan. 31.