HP reports third quarter 2005 results

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An audio webcast of the earnings conference call is available for one year.

• Net revenue of $20.8 billion, up 10% year-over-year
• Non-GAAP operating profit of $1.2 billion, $0.36 earnings per share
• GAAP operating profit of $913 million, $0.03 earnings per share
• Cash flow from operations of $2.2 billion
• Repatriation of $14.5 billion in cash from foreign earnings announced

PALO ALTO, Calif., Aug. 16, 2005 - HP today reported financial results for its third fiscal quarter ended July 31, 2005. Third quarter net revenue increased 10% year-over-year to $20.8 billion. Non-GAAP⁽¹⁾ operating profit was $1.2 billion, with non-GAAP diluted earnings per share (EPS) of $0.36, up from $0.24 in the prior-year period. Non-GAAP financial information for the third quarter excludes $988 million of adjustments⁽¹⁾ on an after-tax basis, or $0.33 per diluted share, related primarily to a tax adjustment resulting from HP's decision in the third quarter to repatriate, in the third and fourth quarters, $14.5 billion in cash from foreign earnings. GAAP operating profit for the third quarter was $913 million and GAAP diluted EPS was $0.03 per share, down from $0.19 in the prior-year period.

	Q3 FY05	Q3 FY04	Y/Y
Revenue ($B)	$20.8	$18.9	10%
Non-GAAP Operating Margin(1)	5.7%	4.5%
GAAP Operating Margin	4.4%	3.5%
Non-GAAP net income (1) ($B)	$1.1	$0.7	46%
GAAP net income (1) ($B)	$0.1	$0.6	-88%
Non-GAAP diluted EPS (1)	$0.36	$0.24	50%
GAAP diluted EPS	$0.03	$0.19	-84%

"We executed well in the third quarter with double-digit revenue growth, solid margin improvements in key segments and strong cash flow," said Mark Hurd, HP chief executive officer and president. "I'm encouraged by what we have achieved to date, and we are focused on driving further performance improvements."

During the quarter, on a year-over-year basis, revenue in the Americas grew 8% to $9.0 billion, Europe, the Middle East and Africa grew 10% to $8.2 billion, and Asia Pacific grew 15% to $3.5 billion. On a consolidated basis, when adjusted for the effects of currency, third quarter revenue grew 7% year-over-year.

Personal Systems Group

Personal Systems Group (PSG) revenue grew 8% year-over-year to $6.4 billion, with unit shipments up 14%. On a year-over-year basis, desktop revenue decreased 3% and notebook revenue grew 21%. Revenue for commercial clients, which includes workstations, grew 6% over the prior-year period, while revenue in consumer clients grew 8%. PSG reported an operating profit of $163 million, or 2.6% of revenue, up from a profit of $23 million in the prior-year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) posted quarterly revenue of $5.9 billion, up 5% year-over-year. On a year-over-year basis, consumer hardware revenue increased 1%, with unit shipments up 8%. Commercial hardware revenue grew 5%, with unit shipments up 12%. Color laser unit shipments increased 31% year-over-year and multi-function printer (MFP) shipments increased 67%, reflecting continued momentum in key growth initiatives. Supplies revenue grew 6%. Operating profit was $771 million, or 13.0% of revenue, down from a profit of $836 million in the prior-year period.

Enterprise Storage and Servers

Enterprise Storage and Servers (ESS) reported revenue of $4.0 billion, up 20% over the prior-year period. On a year-over-year basis, industry-standard server revenue increased 28%, business-critical systems (BCS) revenue grew 7% and networked storage revenue grew 15%. Within BCS, revenue in HP Integrity servers grew 113% year-over-year and HP-UX revenue grew 8%. ESS reported an operating profit of $150 million, or 3.8% of revenue, up from a loss of $211 million in the prior-year period.

HP Services

HP Services (HPS) revenue grew 10% year-over-year to $3.8 billion. On a year-over-year basis, Managed Services revenue grew 21%, Technology Services grew 7% and Consulting and Integration grew 12%. Operating profit was $256 million, or 6.7% of revenue, down from a profit of $314 million in the prior-year period.

Software

Software reported quarterly revenue of $249 million, an increase of 11% year-over-year, with revenue in HP OpenView and HP OpenCall increasing 13% and 5%, respectively. Software reported an operating loss of $40 million, compared with a loss of $48 million in the prior-year period.

Financial Services

HP Financial Services (HPFS) reported revenue of $489 million, essentially flat year-over-year. Finance volume, a leading indicator of future revenue, grew 4% over the prior-year period, and net portfolio assets grew 1 percent to $6.9 billion. Operating profit was $58 million, or 11.9% of revenue, up from a profit of $42 million in the prior-year period.

Asset management

Inventory ended the quarter at $6.6 billion, up $180 million sequentially and down $101 million year-over-year. Accounts receivable decreased $502 million sequentially and increased $299 million over the prior-year period to $8.8 billion. HP's dividend payment of $0.08 per share in the third quarter resulted in cash usage of $231 million. In addition, HP utilized $860 million of cash during the third quarter to repurchase stock. HP exited the quarter with $14.6 billion in gross cash, which includes cash and cash equivalents of $14.4 billion and short- and certain long-term investments of $117 million.

Outlook

HP estimates Q4 FY05 revenue will be in the range of $22.4 billion to $22.8 billion, with non-GAAP earnings per share in the range of $0.44 to $0.47. This excludes after-tax costs of approximately $0.03 per share from amortization of purchased intangible assets, and approximately $900 million, or $0.22 per share in workforce reduction costs. It also excludes a one-time credit of approximately $200 million, or $0.05 per share, related to benefit plan changes.

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 http://www.hp.com/hpinfo/investor/.

HP's Q3 FY05 earnings conference call is accessible via an audio webcast at http://www.hp.com/hpinfo/investor/financials/quarters/2005/q3webcast.html.

About HP

HP is a technology solutions provider to consumers, businesses and institutions globally. The company's offerings span IT infrastructure, global services, business and home computing, and imaging and printing. For the four fiscal quarters ended July 31, 2005, HP revenue totaled $85.2 billion. More information about HP (NYSE, Nasdaq: HPQ) is available at http://www.hp.com.

⁽¹⁾ All non-GAAP numbers have been adjusted to exclude certain items. A reconciliation of specific adjustments to GAAP results for this quarter and the prior periods is included in the table below titled: "Non-GAAP Consolidated Condensed Statements of Earnings." A description of HP's use of non-GAAP information is provided under "Use of Non-GAAP Financial Information."

Use of Non-GAAP Financial Information

To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP uses non-GAAP additional measures of operating results, net earnings and earnings per share adjusted to exclude certain costs, expenses, gains or losses it believes appropriate to enhance an overall understanding of HP's past financial performance and also its prospects for the future. These adjustments to HP's GAAP results are made with the intent of providing both management and investors a more complete understanding of the underlying operational results and trends and HP's marketplace performance. For example, the non-GAAP results are an indication of HP's baseline performance before gains, losses or other charges that are considered by management to be outside of HP's core business segment operational results. In addition, these non-GAAP results are among the primary indicators management uses as a basis for planning and forecasting future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net earnings or diluted earnings per share prepared in accordance with generally accepted accounting principles in the United States.

Forward-Looking Statements

This press release contains forward-looking statements that involve risks, uncertainties and assumptions. If the risks or uncertainties ever materialize or the assumptions prove incorrect, the results of HP may differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including but not limited to any projections of revenue, margins, expenses, earnings, charges, cash repatriation and related tax adjustments or other financial items; any statements of the plans, strategies, and objectives of management for future operations, including execution of any restructuring plans; any statements concerning the expected development, performance or market share relating to products or services; any statements of expectation or belief; and any statements of assumptions underlying any of the foregoing. Risks, uncertainties and assumptions include macroeconomic and geopolitical trends and events; execution and performance of contracts by suppliers, customers and partners; employee management issues; the challenge of managing asset levels, including inventory; the difficulty of aligning expense levels with revenue changes; assumptions related to pension and other post-retirement costs; and other risks that are described from time to time in HP's Securities and Exchange Commission reports, including but not limited to the risks described in HP's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2005 and other reports filed after HP's Annual Report on Form 10-K for the fiscal year ended Oct. 31, 2004. HP assumes no obligation and does not intend to update these forward-looking statements.