HP Reports 1st Quarter 2003 Results

PALO ALTO, Calif.--(BUSINESS WIRE)--Feb. 25, 2003--Hewlett-Packard Company (NYSE: HPQ)

-- Non-GAAP EPS $0.29, up 21% Sequentially, $0.02 Cents Higher Than Analyst Consensus Estimates of $0.27
-- GAAP EPS $0.24, up 85% Sequentially
-- Revenue of $17.9 Billion, Down 1% Sequentially
-- Gross Margin of 26.5%, up 0.6 Points Sequentially
-- Non-GAAP Operating Profit $1.1 Billion, up 25% Sequentially
-- GAAP Operating Profit $879 Million, up 107% Sequentially
-- Personal Systems Reports $33 Million Profit vs. $68 Million Loss in Q4; Enterprise Systems Cuts Loss by 36% Sequentially
-- Affirms Q2 Consensus Estimates of $0.27 Non-GAAP EPS

HP (NYSE: HPQ) today reported financial results for its first fiscal quarter ended Jan. 31, 2003. The company reported first quarter revenue of $17.9 billion, compared to $18.0 billion in the prior quarter. Revenue reflected ongoing weakness in commercial IT spending in the United States and Japan, while Europe and Asia-Pacific posted solid revenue growth quarter over quarter.

Non-GAAP(1) (formerly reported as pro forma) operating profit totaled $1.1 billion, up 25% sequentially. Non-GAAP operating profit was 6.2% of revenue, up from 4.9% of revenue in the prior quarter. Non-GAAP diluted earnings per share (EPS) for the quarter was 29 cents, compared to 24 cents in the fourth quarter, up 21% sequentially. Non-GAAP diluted EPS and operating profit reflect a $156 million adjustment on an after-tax basis, or 5 cents on a diluted per share basis. The pre-tax adjustment includes $138 million of amortization of purchased intangible assets, and $86 million for other acquisition-related items. All non-GAAP financial information in this release is reconciled in the "Non-GAAP Consolidated Condensed Statement of Earnings" table below.

GAAP operating profit for the quarter was $879 million, up 107% sequentially. GAAP operating profit was 4.9% of revenue, up from 2.4% in the prior quarter. GAAP diluted EPS was 24 cents per share, versus 13 cents last quarter, representing an improvement of 85% sequentially.

Gross margin increased from 25.9% to 26.5%, up 0.6 percentage points sequentially, reflecting continued improvement in HP's cost structures. Integration-related cost savings for the first quarter were $734 million, up from $482 million last quarter and 14% above first-quarter plan. Non-GAAP expenses as a percent of revenue were down sequentially from 21% to 20.3% of net revenue.

"HP is making good headway and continues to execute well," said Carly Fiorina, HP chairman and chief executive officer. "The first quarter was our best overall profit performance since the merger, demonstrating there is significant leverage in our operating model. We made good progress on cost structures, achieved sequential market share gains in each of our businesses, and continued to improve gross margins. Our revenue shortfalls were largely confined to the U.S. market, as weak commercial spending continued. Outside the U.S., revenues improved 3% sequentially with strong performance in Europe and Asia-Pacific. Personal Systems posted a profit for the quarter, and Enterprise Systems improved operating results by 36% sequentially.

"Today's world is full of uncertainty and predictions are difficult. We're staying focused on what we can control -- maximizing our operating model leverage, delivering the best possible products and services, accelerating market share gains, staying on the offense and investing in growth. Therefore, we're comfortable affirming analyst consensus estimates of $0.27 for the second quarter."

Summary of Financial Results

                                         Q1 FY2003      Q4 FY2002
Revenue                                $17.9 billion  $18.0 billion
GAAP Operating Margin                          4.9%          2.4%
Non-GAAP Operating Margin(1)                   6.2%          4.9%
GAAP diluted EPS                               $0.24         $0.13
Non-GAAP diluted EPS (1)                       $0.29         $0.24

(1) All non-GAAP numbers (formerly reported as pro forma) have been adjusted to exclude certain items. A reconciliation of the specific adjustments to GAAP results for this quarter and the prior period is included in the non-GAAP income statement below. A description of HP's use of non-GAAP financial information is provided under the heading "Use of Non-GAAP Financial Information" below.

Regionally, Americas revenue declined 7% sequentially to $8.2 billion for the quarter, representing 46% of total revenue. Europe grew 6% sequentially to $7.1 billion, representing 40% of total revenue. Asia-Pacific grew 3% sequentially to $1.9 billion, representing 11% of total revenue. Japan declined 6% sequentially to $744 million in revenue, representing 4% of HP's total revenue.

In addition to posting a quarterly profit, Personal Systems grew sequentially in consumer PCs and handhelds, and reinforced HP's commitment to innovation with strong market acceptance of new Media Center PC, Tablet PC and iPAQ offerings. Imaging and Printing continued to post strong revenue and operating profit, with market share gains across key categories.

Enterprise Systems reduced its operating losses for the second quarter in a row and maintained its strong market position in servers, storage, software and supercomputers. HP Services maintained double-digit profitability during the quarter and posted double-digit sequential revenue growth in managed services.

HP's 20 largest new business contracts in the quarter -- with an average value of more than $100 million each -- represent a total long-term value of more than $2 billion.

According to the latest third-party market reports, HP continues to maintain its broad leadership position with sequential share gains across the business. During the fourth calendar quarter, HP grew its No. 1 share of overall server shipments worldwide to 30%, and grew server revenue sequentially (Gartner Dataquest, Q4'02). Specifically, HP increased its share of UNIX(R) revenue sequentially by 2.2% worldwide, and 7.2% in the United States, displacing Sun as the No. 1 UNIX vendor worldwide. HP also sequentially increased its No. 1 revenue and unit share of Industry Standard Servers worldwide, and grew twice as fast as the nearest competitor in the United States and worldwide. Additionally, HP increased its share of Linux server revenue to 32.8% worldwide (excluding mainframes), up 4.2% sequentially. (All Gartner Dataquest, Q4'02.) In storage, HP grew its No. 1 position in worldwide disk storage revenue to a 27% share, and achieved sequential growth in external RAID, storage software and SAN units shipped (IDC, Q3'02). HP's managed services business is growing faster sequentially than major competitors.

In Personal Systems, HP re-gained the No. 1 position in worldwide PC shipments with sequential unit share gains in total PC clients -- including both home and business PC clients, as well as desktop and notebook PCs (all IDC, Q4'02). In Imaging and Printing, HP extended its market share leadership in the overall U.S. printer market for the third consecutive quarter, where HP holds 59% share (IDC, Q4'02). HP grew unit share by 7% sequentially in both total inkjet printers and laser color printers in the United States, growing faster than the nearest two competitors (IDC, Q4'02). HP also has increased all-in-one inkjet shipments with worldwide share up 20 points from August to December (NPD Intelect).

Business Segment Results

As a standard part of HP's business review process, the company has moved certain items between its core business segments and "other." While these movements have some impact on results of the company's other segments, all periods have been restated for comparative purposes.

Personal Systems

Personal Systems revenue totaled $5.1 billion, reflecting 2% sequential growth. Operating profit was $33 million, compared to a loss of $68 million last quarter.

First quarter revenues reflect significant sequential increases in consumer PC and handheld revenue, driven by new product introductions and normal seasonality, while notebooks, commercial PCs and workstations declined sequentially. Revenue declines reflect persistent softness in corporate IT spending and intense competition.

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