HP's quarter by the numbers; channel stuffing chorus may rev up

Hewlett-Packard continues to fire on all cylinders as rivals like Dell stumble, but don't be surprised if the channel stuffing chorus gets revved up.

The company reported earnings of 65 cents a share excluding items on revenue of $25.1 billion. Under generally accepted accounting principles (GAAP) HP had earnings of 55 cents a share. According to Thomson Financial, Wall Street was looking for earnings of 62 cents a share on revenue of $24.3 billion.

HP's outlook was also solid. The company projected second quarter non-GAAP revenue of 63 cents a share to 64 cents. Revenue is projected to be $24.5 billion.

Second quarter estimates called for earnings of 63 cents a share on revenue of $24 billion.

For the fiscal 2007 HP projected better than respected results with non-GAAP earnings of $2.60 to $2.65 a share on revenue of $98 billion to $99 billion. For fiscal 2007, HP was expected to report earnings of $2.57 a share on revenue of $97 billion.

But those numbers aren't what is drawing attention. Some key numbers:

Inventory is inflated. Inventory at the end of the first quarter was $8.4 billion, up $630 million over the fourth quarter and $1.6 billion from a year ago. Bank of America analyst Keith Bachman said ahead of the earnings that HP's inventory levels will be closely watched. He expected HP inventory to rise from the October to January quarter as it has the last few years. But this gain is larger than expected. Typically, inventory levels in the first quarter are up $100 million or so compared to the previous quarter.

The criticism will be that HP stuffed the channel, but Bachman notes the following:

• HP built inventory ahead of the Vista release. The catch: Vista's launch happened just as HP's quarter was ending. Meanwhile, it's unclear how Vista has been selling and customers are just now taking the new OS for a spin.
  
• HP has been buying components for PCs when it gets a good price;
• And February sales are likely to bring down inventory levels.

PC sales were strong. HP said revenue in its Personal Systems Group was up 17 percent from a year ago to $8.7 billion. Notebook revenue was up 40 percent from a year ago, but desktop revenue fell 1 percent. Commercial PC sales were up 8 percent while consumer sales jumped 28 percent. Operating profit was $414 million.

Imaging and printing revenue was up 7 percent. Printing revenue came in at $7 billion. Supplies revenue grew 11 percent, but commercial and consumer printer sales were roughly flat compared to a year ago. The division remains a cash cow with operating profits of $1.1 billion.

Enterprise systems decent. Enterprise server revenue was up 5 percent to $4.5 billion. Standard server sales were up 10 percent with blade sales jumping 45 percent. Storage revenue grew 3 percent. Operating profit clocked in at $416 million.

Mercury fuels software. HP's software revenue was $550 million, up 81 percent from a year ago. Excluding Mercury sales software revenue growth was up 7 percent. Operating profit was $47 million.

Services up 5 percent. HP's services unit revenue was $3.9 billion in the quarter. Technology services growth, however, was up 1 percent from a year ago.