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Hurd Plans to Herd EDS into HP

Posted on Wednesday, May 21st 2008

Early year in the year, I observed that HP looks recession proof. Its recent EDS acquisition and earnings announcements go on to say just that. HP (NYSE:HPQ) yesterday reported a strong second quarter driven by strong international sales that accounted for 70% of its revenue and offset weakness in the US market. Earlier coverage is available here and here.

Revenue was up 11% y-o-y to $28.3 billion. Sequentially, revenue was down marginally by 0.7% from $28.5 billion last quarter. GAAP operating profit was up 22% to $2.6 billion ($0.80 EPS). Non-GAAP operating profit was up 22% to $2.8 billion ($0.87 EPS). During the quarter, it bought back shares worth $2.8 billion and paid dividends for $197 million.

Region-wise, revenue from the Americas grew 4% y-o-y to $11.1 billion, EMEA grew 16% to $11.9 billion, and Asia Pacific grew 16% to $5.2 billion. Revenue from Brazil, Russia, India and China (BRIC) grew 26% y-o-y and accounts for 10% of total revenue.

Segment-wise, Personal Systems Group (PSG) revenue grew 16% y-o-y to $10.1 billion, driven by 31% growth in notebooks. Imaging and Printing Group (IPG) revenue grew 6% year over year to $7.6 billion led by supplies growth of 8%.

Enterprise Storage and Servers (ESS) revenue was $4.8 billion, up 4% driven by 68% growth in ESS blades and 14% growth in storage. Industry standard server revenue was however flat compared to particularly strong sales last year and a tough 17% compare.

HP Services (HPS) revenue grew 12% to $4.6 billion with Technology Services growing 10%, Outsourcing Services 14% and Consulting and Integration 15%.

HP Software revenue grew 28% driven by 36% growth in the Business Technology Optimization portfolio. HP Financial Services (HPFS) revenue was $685 million, up 25% y-o-y.

For Q3, HP estimates revenue to be in the range of $27.3 billion to $27.4 billion. GAAP diluted EPS is expected between $0.76 and $0.77. FY08 revenue is expected between $114.2 billion and $114.4 billion, up from previous guidance of $113.5 billion to $114.0 billion. FY08 GAAP diluted EPS is expected between $3.30 and $3.34.

HP plans to acquire technology outsourcing company EDS for $13.9 billion to accelerate its reach in key enterprise accounts. This acquisition would also place it in a challenger position behind IBM in the $748 billion computer services market where it currently is at No.5 with 2.2%. EDS is currently at No.2 with 3% and IBM leads with 7.2% market share.

HP, with its $115.5 billion market cap and cash hoard of $11.6 billion and market cap of around $114 billion, can manage a $13.9 billion deal. Can they integrate this huge acquisition? Time will tell. The Compaq integration went just fine, although Fiorina lost her job, and Mark Hurd had to come in and clean up. With Hurd in charge, I have less concerns on operations and integration.

The Indian outsourcers will now need to compete with behemoths IBM and HP, as well as Accenture and one another. There are some 3500 of them, so roll-ups are definitely recommended, as HP digests EDS.

The market didn’t react too well to news of the deal and HP’s shares fell from a high of about $50 to trade around $46.

Chart for Hewlett-Packard Co. (HPQ)

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