HP Reports Second Quarter 2006 Results
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HP Reports Second Quarter 2006 Results

PALO ALTO, Calif.—(BUSINESS WIRE)—May 16, 2006— HP (NYSE: HPQ)(Nasdaq: HPQ):

-- Net revenue of $22.6 billion, up 5% year-over-year, or 8% when adjusted for the effects of currency

-- GAAP operating profit of $1.7 billion, or $0.51 earnings per share, up from $0.33 in the prior-year period

-- Non-GAAP operating profit of $1.8 billion, or $0.54 earnings per share, up from $0.37 in the prior-year period

-- Cash flow from operations of $3.6 billion

HP (NYSE: HPQ)(Nasdaq: HPQ) today announced financial results for its second fiscal quarter ended April 30, 2006, with net revenue of $22.6 billion, representing growth of 5% year-over-year, or 8% when adjusted for the effects of currency. GAAP operating profit was $1.7 billion and GAAP diluted earnings per share (EPS) was $0.51 per share, up from $0.33 in the prior-year period.

Non-GAAP operating profit was $1.8 billion, with non-GAAP diluted EPS of $0.54, up from $0.37 in the prior-year period. Non-GAAP financial information excludes $97 million of adjustments on an after-tax basis, or $0.03 per diluted share, related primarily to amortization of purchased intangibles. GAAP and non-GAAP financial information include stock-based compensation expense in the current financial period only.

"HP delivered another solid quarter," said Mark Hurd, HP chief executive officer and president. "We grew revenue, expanded margins and generated record cash flow. At the same time, we continued to remain focused on executing our strategy and investing in the company's long-term success."
                                   Q2 FY06     Q2 FY05     Y/Y
                                   --------    -------    ----- 
Net revenue ($B)                    $22.6       $21.6       5%
GAAP operating margin                 7.3%        5.4%    1.9 pts
GAAP net income ($B)                 $1.5        $1.0      51%
GAAP diluted EPS                    $0.51       $0.33      55% 
Non-GAAP operating margin             8.0%        6.1%    1.9 pts
Non-GAAP net income($B)              $1.6        $1.1      45% 
Non-GAAP diluted EPS                $0.54       $0.37      46%


Information about HP's use of non-GAAP financial information is provided under "Use of non-GAAP financial information" below.

During the quarter, on a year-over-year basis, revenue in the Americas grew 10% to $9.7 billion, revenue in Europe, the Middle East and Africa declined 2% to $9.0 billion, and revenue in Asia Pacific grew 7% to $3.9 billion. When adjusted for the effects of currency, revenue in Europe, the Middle East and Africa grew 6%, and revenue in Asia Pacific grew 10%.

Personal Systems Group

Personal Systems Group (PSG) revenue grew 10% year-over-year to $7.0 billion, with unit shipments up 16%. On a year-over-year basis, desktop revenue increased 1% and notebook revenue grew 27%. Commercial client revenue grew 3% year-over-year, while Consumer client revenue increased 24%. Operating profit was $248 million, or 3.6% of revenue, up from a profit of $147 million, or 2.3% of revenue, in the prior-year period.

Imaging and Printing Group

Imaging and Printing Group (IPG) revenue grew 5% year-over-year to $6.7 billion. On a year-over-year basis, supplies revenue grew 10%, commercial hardware revenue grew 4% and consumer hardware revenue declined 8%. Momentum in key growth initiatives continued, with color laser printer shipments and printer-based MFP shipments up 38% and 44% year-over-year, respectively. HP Indigo Press printed page volume grew 42% over the prior-year period. Operating profit was $1.0 billion, or 15.5% of revenue, up from a profit of $814 million, or 12.7% of revenue, in the prior-year period.

Enterprise Storage and Servers

Enterprise Storage and Servers (ESS) reported revenue of $4.3 billion, up 2% over the prior-year period. On a year-over-year basis, industry-standard server revenue increased 4%, with blade revenue growth of 60%. Networked storage revenue grew 8%, led by continued strength in external arrays, where high-end XP revenue grew 8% and revenue in the mid-range EVA line increased 46%. Business critical systems revenue declined 7%, as Integrity systems growth of 93% was offset by declines in PA-RISC and Alpha. Operating profit was $322 million, or 7.5% of revenue, up from a profit of $180 million, or 4.3% of revenue, in the prior-year period.

HP Services

HP Services (HPS) revenue declined 2% year-over-year to $3.9 billion. On a year-over-year basis, revenue in Technology Services declined 4%, Consulting and Integration revenue declined 2% and Managed Services revenue grew 2%. Excluding the effects of currency, HPS revenue grew 2% year-over-year. Operating profit was $345 million, or 8.9% of revenue, up from a profit of $292 million, or 7.3% of revenue, in the prior-year period.

Software

Software revenue was $330 million, an increase of 20% year-over-year, with revenue in HP OpenView and HP OpenCall increasing 25% and 11%, respectively. HP OpenView growth was led by solid momentum associated with the recently completed acquisition of Peregrine Systems, Inc., which added key asset and service management components to the HP OpenView portfolio. Operating profit was $3 million, or 0.9% of revenue, compared with a loss of $2 million in the prior-year period.

Financial Services

HP Financial Services (HPFS) reported revenue of $518 million, a decrease of 5% year-over-year. Finance volume decreased 14% over the prior-year period, and net portfolio assets grew 1%. Operating profit was $39 million, or 7.5% of revenue, down from a profit of $58 million, or 10.7% of revenue, in the prior-year period.

Asset management

Inventory ended the quarter at $6.8 billion, up $37 million sequentially and $304 million year-over-year. Accounts receivable increased $1.1 billion sequentially and $517 million over the prior-year period to $9.8 billion. HP's dividend payment of $0.08 per share in the second quarter resulted in cash usage of $226 million. HP utilized $1.3 billion of cash during the second quarter to repurchase approximately 40 million shares of common stock. In addition, HP received approximately 7 million shares of common stock under the company's prepaid variable share purchase program. HP exited the quarter with $14.1 billion in gross cash, which includes cash and cash equivalents of $14.0 billion, short-term investments of $12 million, and certain long-term investments of $18 million.

Outlook

HP estimates Q3 FY06 revenue will be approximately $21.750 billion, and full year FY06 revenue will be approximately $91.0 billion, in line with current analyst consensus expectations.

Third quarter GAAP diluted EPS is expected to be in the range of $0.41 to $0.44, and non-GAAP diluted EPS is expected to be in the range of $0.45 to $0.48. Non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.04 per share, related primarily to the amortization of purchased intangible assets. Third quarter GAAP and non-GAAP diluted EPS estimates include $0.03 of stock-based compensation expense.

Full year GAAP diluted EPS expected to be in the range of $1.87 to $1.91, and full year FY06 non-GAAP diluted EPS is expected to be in the range of $2.04 to $2.08. Full year FY06 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.17 per share, related primarily to the amortization of purchased intangible assets. Full year FY06 non-GAAP and GAAP diluted EPS estimates include $0.13 of stock-based compensation expense.

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 www.hp.com/hpinfo/investor/.

HP's Q2 FY06 earnings conference call is accessible via an audio webcast at www.hp.com/hpinfo/investor/financials/quarters/2006/q2webcast.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 April 30, 2006, HP revenue totaled $88.9 billion. More information about HP is available at www.hp.com.

Use of non-GAAP financial information

To supplement HP's consolidated condensed financial statements presented on a GAAP basis, HP provides non-GAAP operating profit, non-GAAP operating margin, non-GAAP net income, non-GAAP diluted earnings per share and gross cash. HP also provides forecasts of non-GAAP diluted earnings per share.

Non-GAAP operating profit, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share are defined to exclude the effects of restructuring charges, charges relating to the amortization of intangible assets, in-process research and development charges and gains or losses on investments. Gross cash is a non-GAAP measure that is defined as GAAP cash and cash equivalents plus GAAP short-term investments and certain long-term investments that may be liquidated within 90 days pursuant to the terms of existing put options or similar rights. A reconciliation of adjustments to GAAP results for this quarter, fiscal year-to-date, and prior periods is included in the tables below.

HP's management uses non-GAAP operating profit, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share to evaluate and forecast HP's baseline performance before gains, losses or other charges that are considered by management to be outside of HP's core business segment operating results. Gross cash is considered to be a liquidity measure and provides useful information to management about the amount of cash available for investment in HP's businesses, funding strategic acquisitions, repurchasing stock and other purposes. Each of these non-GAAP measures is among the primary indicators management uses as a basis for planning and forecasting future periods. HP's management believes that these non-GAAP measures provide both management and investors with a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of HP's financial performance, liquidity and prospects for the future.

This additional non-GAAP financial information is not meant to be considered in isolation or as a substitute for operating profit, operating margin, net income, diluted earnings per share, or cash and cash equivalents prepared in accordance with GAAP. In addition, there may be limitations associated with the use of these non-GAAP financial measures. For example, items such as restructuring charges that are excluded from non-GAAP operating profit, non-GAAP operating margin, non-GAAP net income and non-GAAP diluted earnings per share can have a material impact on cash flows. In addition, there may be restrictions on our ability to liquidate the long-term investments included in gross cash, which may limit the usefulness of gross cash as a liquidity measure. These effects are reflected in HP's GAAP financial statements, including HP's consolidated statements of cash flows. The non-GAAP financial information that HP has provide also may differ from the non-GAAP financial information provided by other companies.

Forward-looking statements

This news 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, charges, earnings 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 Annual Report on Form 10-K for the fiscal year ended October 31, 2005, HP's Quarterly Report on Form 10-Q for the fiscal quarter ended January 31, 2006 and other reports filed after that report. As in prior quarters, the financial information set forth in this release, including tax-related items, are estimates based on information available at this time. While HP believes these estimates to be meaningful, these amounts could differ materially from actual reported amounts in HP's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2006. In particular, determining HP's actual tax balances and provisions as of April 30, 2006 and for the fiscal quarter then ended requires extensive internal and external review of tax data (including consolidating and reviewing the tax provisions of numerous domestic and foreign entities) which is being completed in the ordinary course of preparing HP's Form 10-Q. HP assumes no obligation and does not intend to update these forward-looking statements.

(C) 2006 Hewlett-Packard Development Company, L.P. HP shall not be liable for technical or editorial errors or omissions contained herein.

               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
             CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                              (Unaudited)
                (In millions except per share amounts)

                                                Three months ended
                                            --------------------------
                                             April   January   April
                                               30,      31,      30,
                                              2006     2006     2005
                                            -------- -------- --------

Net revenue                                 $22,554  $22,659  $21,570

Costs and expenses(a):
     Cost of sales                           16,970   17,392   16,429
     Research and development                   930      871      890
     Selling, general and administrative      2,858    2,692    2,933
     Restructuring                              (14)      15        4
     Amortization of purchased intangible
      assets                                    151      147      151
     In-process research and development
      charges                                     2       50        -
                                            -------- -------- --------
          Total costs and expenses           20,897   21,167   20,407
                                            -------- -------- --------

Earnings from operations                      1,657    1,492    1,163

Interest and other, net                         157       38      (87)
Gains (losses) on investments                     6       (2)       3
                                            -------- -------- --------

Earnings before taxes                         1,820    1,528    1,079

Provision for taxes(b)                          364      301      113
                                            -------- -------- --------

Net earnings                                 $1,456   $1,227     $966
                                            ======== ======== ========

Net earnings per share:
     Basic                                    $0.52    $0.43    $0.33
     Diluted                                  $0.51    $0.42    $0.33


Cash dividends declared per share                $-    $0.16       $-

Weighted-average shares used to compute net earnings per share:
     Basic                                    2,809    2,822    2,886
     Diluted                                  2,887    2,893    2,917

(a) Stock-based compensation expense included under SFAS 123R were
    as follows:
     Cost of sales                              $33      $39       $-
     Research and development                    15       18        -
     Selling, general and administrative         76       87        -
                                            -------- -------- --------
          Total costs and expenses             $124     $144       $-

(b) Tax benefit from stock-based
    compensation                               $(39)    $(43)      $-


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
             CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                              (Unaudited)
                (In millions except per share amounts)


                                                     Six months ended
                                                         April 30,
                                                     -----------------
                                                       2006     2005
                                                     -------- --------

Net revenue                                          $45,213  $43,024

Costs and expenses(a):
     Cost of sales                                    34,362   32,966
     Research and development                          1,801    1,768
     Selling, general and administrative               5,550    5,637
     Restructuring                                         1        7
     Amortization of purchased intangible assets         298      318
     In-process research and development charges          52        -
                                                     -------- --------
          Total costs and expenses                    42,064   40,696
                                                     -------- --------

Earnings from operations                               3,149    2,328

Interest and other, net                                  195      (62)
Gains (losses) on investments                              4      (21)
Dispute settlement                                         -     (116)
                                                     -------- --------

Earnings before taxes                                  3,348    2,129

Provision for taxes(b)                                   665      220
                                                     -------- --------

Net earnings                                          $2,683   $1,909
                                                     ======== ========

Net earnings per share:
     Basic                                             $0.95    $0.66
     Diluted                                           $0.93    $0.65


Cash dividends declared per share                      $0.16    $0.16

Weighted-average shares used to compute net earnings per share:
     Basic                                             2,815    2,897
     Diluted                                           2,890    2,926

(a) Stock-based compensation expense included under SFAS 123R were
    as follows:
     Cost of sales                                       $72       $-
     Research and development                             33        -
     Selling, general and administrative                 163        -
                                                     -------- --------
          Total costs and expenses                      $268       $-

(b) Tax benefit from stock-based compensation           $(82)      $-



               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
        NON-GAAP CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                              (Unaudited)
                (In millions except per share amounts)

                                                Three months ended
                                            --------------------------
                                             April   January   April
                                               30,      31,      30,
                                              2006     2006     2005
                                            -------- -------- --------

Net revenue                                 $22,554  $22,659  $21,570

Costs and expenses(a):
     Cost of sales                           16,970   17,392   16,429
     Research and development                   930      871      890
     Selling, general and administrative      2,858    2,692    2,933
                                            -------- -------- --------
          Total costs and expenses           20,758   20,955   20,252
                                            -------- -------- --------

Non-GAAP earnings from operations             1,796    1,704    1,318

Interest and other, net                         157       38      (87)
                                            -------- -------- --------

Non-GAAP earnings before taxes                1,953    1,742    1,231

Provision for taxes(b)                          400      349      158
                                            -------- -------- --------

Non-GAAP net earnings                        $1,553   $1,393   $1,073
                                            ======== ======== ========

Non-GAAP net earnings per share:
     Basic                                    $0.55    $0.49    $0.37
     Diluted                                  $0.54    $0.48    $0.37

Weighted-average shares used to compute non-GAAP net earnings
 per share:
     Basic                                    2,809    2,822    2,886
     Diluted                                  2,887    2,893    2,917

(a) Stock-based compensation expense included under SFAS 123R were
    as follows:
     Cost of sales                              $33      $39       $-
     Research and development                    15       18        -
     Selling, general and administrative         76       87        -
                                            -------- -------- --------
          Total costs and expenses             $124     $144       $-

(b) Tax benefit from stock-based
    compensation                               $(39)    $(43)      $-


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
    NON-GAAP RECONCILIATION OF OPERATING PROFIT, OPERATING MARGIN,
              NET EARNINGS AND DILUTED EARNINGS PER SHARE
                              (Unaudited)
                (In millions except per share amounts)

                                                 Three months ended
                                               -----------------------
                                                April  January  April
                                                 30,     31,     30,
                                                2006    2006    2005
                                               ------- ------- -------

NON-GAAP Operating Profit and Operating Margin Reconciliation

GAAP operating profit                          $1,657  $1,492  $1,163

     Restructuring                                (14)     15       4
     Amortization of purchased intangible
      assets                                      151     147     151
     In-process research and development
      charges                                       2      50       -
                                               ------- ------- -------
          Total non-GAAP adjustments to
           earnings from operations               139     212     155
                                               ------- ------- -------

Non-GAAP operating profit                      $1,796  $1,704  $1,318
                                               ======= ======= =======

GAAP operating margin                               7%      7%      5%
Non-GAAP adjustments to operating margin            1%      1%      1%
Non-GAAP operating margin                           8%      8%      6%

NON-GAAP Net Earnings and Diluted EPS Reconciliation

GAAP net earnings                              $1,456  $1,227    $966

     Restructuring                                (14)     15       4
     Amortization of purchased intangible
      assets                                      151     147     151
     In-process research and development
      charges                                       2      50       -
                                               ------- ------- -------
          Total non-GAAP adjustments to
           earnings from operations               139     212     155

(Gains) losses on investments                      (6)      2      (3)
Income tax effect of reconciling items            (36)    (48)    (45)
                                               ------- ------- -------

Non-GAAP net earnings                          $1,553  $1,393  $1,073
                                               ======= ======= =======

GAAP diluted net earnings per share             $0.51   $0.42   $0.33

Non-GAAP adjustments to GAAP diluted net
 earnings per share                              0.03    0.06    0.04
                                               ------- ------- -------

Non-GAAP diluted net earnings per share         $0.54   $0.48   $0.37
                                               ======= ======= =======

Weighted-average shares used to compute both
 GAAP and non-GAAP diluted net earnings per
 share:                                         2,887   2,893   2,917
                                               ======= ======= =======


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
        NON-GAAP CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
                              (Unaudited)
                (In millions except per share amounts)


                                                     Six months ended
                                                         April 30,
                                                     -----------------
                                                       2006     2005
                                                     -------- --------

Net revenue                                          $45,213  $43,024

Costs and expenses(a):
     Cost of sales                                    34,362   32,966
     Research and development                          1,801    1,768
     Selling, general and administrative               5,550    5,637
                                                     -------- --------
          Total costs and expenses                    41,713   40,371
                                                     -------- --------

Non-GAAP earnings from operations                      3,500    2,653

Interest and other, net                                  195      (62)
Dispute settlement                                         -     (116)
                                                     -------- --------

Non-GAAP earnings before taxes                         3,695    2,475

Provision for taxes(b)                                   749      324
                                                     -------- --------

Non-GAAP net earnings                                 $2,946   $2,151
                                                     ======== ========

Non-GAAP net earnings per share:
     Basic                                             $1.05    $0.74
     Diluted                                           $1.02    $0.74

Weighted-average shares used to compute non-GAAP net earnings
 per share:
     Basic                                             2,815    2,897
     Diluted                                           2,890    2,926

(a) Stock-based compensation expense included under SFAS 123R were
    as follows:
     Cost of sales                                       $72       $-
     Research and development                             33        -
     Selling, general and administrative                 163        -
                                                     -------- --------
          Total costs and expenses                      $268       $-

(b) Tax benefit from stock-based compensation           $(82)      $-



               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
    NON-GAAP RECONCILIATION OF OPERATING PROFIT, OPERATING MARGIN,
              NET EARNINGS AND DILUTED EARNINGS PER SHARE
                              (Unaudited)
                (In millions except per share amounts)

                                                         Six months
                                                            ended
                                                          April 30,
                                                       ---------------
                                                         2006    2005
                                                       ------- -------

NON-GAAP Operating Profit and Operating Margin Reconciliation

GAAP operating profit                                  $3,149  $2,328

     Restructuring                                          1       7
     Amortization of purchased intangible assets          298     318
     In-process research and development charges           52       -
                                                       ------- -------
          Total non-GAAP adjustments to earnings
            from operations                               351     325
                                                       ------- -------

Non-GAAP operating profit                              $3,500  $2,653
                                                       ======= =======

GAAP operating margin                                       7%      5%
Non-GAAP adjustments to operating margin                    1%      1%
Non-GAAP operating margin                                   8%      6%

NON-GAAP Net Earnings and Diluted EPS Reconciliation

GAAP net earnings                                      $2,683  $1,909

     Restructuring                                          1       7
     Amortization of purchased intangible assets          298     318
     In-process research and development charges           52       -
                                                       ------- -------

            Total non-GAAP adjustments to earnings
             from operations                              351     325

(Gains) losses on investments                              (4)     21
Income tax effect of reconciling items                    (84)   (104)
                                                       ------- -------

Non-GAAP net earnings                                  $2,946  $2,151
                                                       ======= =======


GAAP diluted net earnings per share                     $0.93   $0.65
Non-GAAP adjustments to GAAP diluted net earnings
 per share                                               0.09    0.09
                                                       ------- -------

Non-GAAP diluted net earnings per share                 $1.02   $0.74
                                                       ======= =======

Weighted-average shares used to compute both GAAP and
 non-GAAP diluted net earnings per share:               2,890   2,926
                                                       ======= =======


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED BALANCE SHEETS
                             (In millions)


                                                April 30,  October 31,
                                                  2006        2005
                                               ----------- -----------
                                               (unaudited)

ASSETS

Current assets:
     Cash and cash equivalents                    $14,032     $13,911
     Short-term investments                            12          18
     Accounts receivable, net                       9,783       9,903
     Financing receivables, net                     2,540       2,551
     Inventory                                      6,768       6,877
     Other current assets                           9,073      10,074
                                               ----------- -----------

        Total current assets                       42,208      43,334
                                               ----------- -----------

Property, plant and equipment, net                  6,351       6,451

Long-term financing receivables and other
 assets                                             8,210       7,502

Goodwill and purchased intangibles, net            20,430      20,030
                                               ----------- -----------

Total assets                                      $77,199     $77,317
                                               =========== ===========


LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Notes payable and short-term borrowings       $2,609      $1,831
     Accounts payable                              10,077      10,223
     Employee compensation and benefits             2,538       2,343
     Taxes on earnings                              2,365       2,367
     Deferred revenue                               4,101       3,815
     Accrued restructuring                            872       1,119
     Other accrued liabilities                     10,354       9,762
                                               ----------- -----------

        Total current liabilities                  32,916      31,460
                                               ----------- -----------

Long-term debt                                      2,406       3,392
Other liabilities                                   5,266       5,289

Stockholders' equity                               36,611      37,176
                                               ----------- -----------

Total liabilities and stockholders' equity        $77,199     $77,317
                                               =========== ===========


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
            CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                              (Unaudited)
                             (In millions)

                                                    Three      Six
                                                    Months    Months
                                                    Ended     Ended
                                                   April 30, April 30,
                                                     2006      2006
                                                   --------- ---------
Cash flows from operating activities:
   Net earnings                                      $1,456    $2,683
   Adjustments to reconcile net earnings to
    net cash provided by operating activities:
     Depreciation and amortization                      596     1,159
     Stock-based compensation expense                   124       268
     Provision for bad debt and inventory                37       139
     Gains on investments                                (6)       (4)
     In-process research and development charges          2        52
     Restructuring-related charges                      (14)        1
     Deferred taxes on earnings                         185       240
     Excess tax benefit from stock-based
      compensation                                      (58)     (123)
     Other, net                                          28       105
   Changes in assets and liabilities:
     Accounts and financing receivables              (1,055)      138
     Inventory                                          (85)        4
     Accounts payable                                 1,145      (146)
     Taxes on earnings                                   13       (59)
     Restructuring                                     (162)     (324)
     Other assets and liabilities                     1,428     1,347
                                                   --------- ---------
        Net cash provided by operating activities     3,634     5,480
                                                   --------- ---------
Cash flows from investing activities:
     Investment in property, plant and equipment,
      net                                              (521)     (948)
     Proceeds from sale of property, plant and
      equipment                                         120       225
     Purchases of available-for-sale securities
      & other investments                                (4)      (17)
     Maturities and sales of available-for-sale
      securities & other investments                     14        35
     Net cash paid for business acquisitions,
      net of acquisition costs                         (107)     (760)
                                                   --------- ---------
        Net cash used in investing activities          (498)   (1,465)
                                                   --------- ---------
Cash flows from financing activities:
     Decrease in notes payable and short-term
      borrowings, net                                   (41)     (109)
     Issuance of debt                                     2        83
     Payment of debt                                    (18)     (249)
     Issuance of common stock under employee plans      507     1,154
     Repurchase of common stock                      (1,320)   (2,721)
     Prepayment of common stock repurchases               -    (1,722)
     Excess tax benefit from stock-based
      compensation                                       58       123
     Dividends                                         (226)     (453)
                                                   --------- ---------
        Net cash used in financing activities        (1,038)   (3,894)
                                                   --------- ---------

Increase in cash and cash equivalents                 2,098       121
Cash and cash equivalents at beginning of period     11,934    13,911
                                                   --------- ---------
Cash and cash equivalents at end of period          $14,032   $14,032
                                                   ========= =========


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                          SEGMENT INFORMATION
                              (Unaudited)
                             (In millions)

                                                Three months ended
                                            --------------------------
                                             April   January   April
                                               30,      31,      30,
                                              2006     2006   2005(a)
                                            -------- -------- --------

Net revenue:

    Enterprise Storage and Servers           $4,265   $4,240   $4,187
    HP Services                               3,892    3,757    3,984
    Software                                    330      304      274
                                            -------- -------- --------
  Technology Solutions Group                  8,487    8,301    8,445
                                            -------- -------- --------
  Personal Systems Group                      6,977    7,449    6,369
  Imaging and Printing Group                  6,724    6,545    6,390
  HP Financial Services                         518      496      544
  Corporate Investments                         122      129      123
                                            -------- -------- --------
    Total Segments                           22,828   22,920   21,871
  Eliminations of intersegment
   net revenue and other                       (274)    (261)    (301)
                                            -------- -------- --------

    Total HP Consolidated                   $22,554  $22,659  $21,570
                                            ======== ======== ========

Earnings from operations:

    Enterprise Storage and Servers             $322     $326     $180
    HP Services                                 345      293      292
    Software                                      3        9       (2)
                                            -------- -------- --------
  Technology Solutions Group                    670      628      470
                                            -------- -------- --------
  Personal Systems Group                        248      293      147
  Imaging and Printing Group                  1,041      973      814
  HP Financial Services                          39       38       58
  Corporate Investments                         (49)     (33)     (51)
                                            -------- -------- --------
     Total Segments                           1,949    1,899    1,438

  Corporate and unallocated costs and
   eliminations, excluding stock-based
   compensation expense                         (50)     (72)    (120)
  Unallocated costs related to stock-based
   compensation expense                        (103)    (123)       -
  Restructuring                                  14      (15)      (4)
  In-process research and development
   charge                                        (2)     (50)       -
  Amortization of purchased intangible
   assets                                      (151)    (147)    (151)
  Interest and other, net                       157       38      (87)
  Gains (losses) on investments                   6       (2)       3
                                            -------- -------- --------

    Total HP Consolidated Earnings Before
     Taxes                                   $1,820   $1,528   $1,079
                                            ======== ======== ========

(a) Reflects certain fiscal 2006 organizational realignments
    retroactively to provide improved visibility and comparability.
    For each of the quarters in fiscal year 2005, the realignments
    resulted primarily in revenue and operating profit movement of $5
    million or less between ESS and SW segments within TSG. There was
    no impact to the remaining segments.


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                          SEGMENT INFORMATION
                              (Unaudited)
                             (In millions)

                                                     Six months ended
                                                         April 30,
                                                     -----------------
                                                       2006    2005(a)
                                                     -------- --------

Net revenue:

    Enterprise Storage and Servers                    $8,505   $8,238
    HP Services                                        7,649    7,799
    Software                                             634      510
                                                     -------- --------
  Technology Solutions Group                          16,788   16,547
                                                     -------- --------
  Personal Systems Group                              14,426   13,242
  Imaging and Printing Group                          13,269   12,457
  HP Financial Services                                1,014    1,099
  Corporate Investments                                  251      238
                                                     -------- --------
    Total Segments                                    45,748   43,583

  Eliminations of intersegment
   net revenue and other                                (535)    (559)
                                                     -------- --------

    Total HP Consolidated                            $45,213  $43,024
                                                     ======== ========

Earnings from operations:

    Enterprise Storage and Servers                      $648     $249
    HP Services                                          638      573
    Software                                              12      (40)
                                                     -------- --------
  Technology Solutions Group                           1,298      782
                                                     -------- --------
  Personal Systems Group                                 541      294
  Imaging and Printing Group                           2,014    1,746
  HP Financial Services                                   77      103
  Corporate Investments                                  (82)    (102)
                                                     -------- --------
     Total Segments                                    3,848    2,823

  Corporate and unallocated costs and
   eliminations, excluding stock-based
   compensation expense                                 (122)    (170)
  Unallocated costs related to stock-based
   compensation expense                                 (226)       -
  Restructuring                                           (1)      (7)
  In-process research and development charge             (52)       -
  Amortization of purchased intangible assets           (298)    (318)
  Interest and other, net                                195      (62)
  Gains (losses) on investments                            4      (21)
  Dispute settlement                                       -     (116)
                                                     -------- --------

    Total HP Consolidated Earnings Before Taxes       $3,348   $2,129
                                                     ======== ========

(a) Reflects certain fiscal 2006 organizational realignments
    retroactively to provide improved visibility and comparability.
    For the period in fiscal year 2005, the realignments resulted
    primarily in revenue and operating profit movement of $5 million
    or less between ESS and SW segments within TSG. There was no
    impact to the remaining segments.


               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                  SEGMENT / BUSINESS UNIT INFORMATION
                              (Unaudited)
                             (In millions)

                                                Three months ended
                                            --------------------------
                                             April   January   April
                                               30,      31,      30,
                                              2006     2006   2005(a)
                                            -------- -------- --------

Net revenue:

     Industry Standard Servers               $2,454   $2,482   $2,371
     Business Critical Systems                  920      906      991
     Storage                                    891      852      825
                                            -------- -------- --------
    Enterprise Storage and Servers            4,265    4,240    4,187
                                            -------- -------- --------
     Technology Services                      2,368    2,346    2,464
     Managed Services                           788      746      771
     Consulting & Integration                   736      665      749
                                            -------- -------- --------
    HP Services                               3,892    3,757    3,984
                                            -------- -------- --------
     OpenView                                   228      205      182
     OpenCall & Other                           102       99       92
                                            -------- -------- --------
    Software                                    330      304      274
                                            -------- -------- --------
  Technology Solutions Group                  8,487    8,301    8,445
                                            -------- -------- --------
     Desktops                                 3,569    3,854    3,541
     Notebooks                                2,815    2,954    2,212
     Workstations                               338      329      306
     Handhelds                                  129      216      189
     Other                                      126       96      121
                                            -------- -------- --------
  Personal Systems Group                      6,977    7,449    6,369
                                            -------- -------- --------
     Commercial Hardware                      1,739    1,655    1,677
     Consumer Hardware                        1,015    1,223    1,100
     Supplies                                 3,957    3,652    3,601
     Other                                       13       15       12
                                            -------- -------- --------
  Imaging and Printing Group                  6,724    6,545    6,390
                                            -------- -------- --------
  HP Financial Services                         518      496      544
  Corporate Investments                         122      129      123
                                            -------- -------- --------
     Total Segments                          22,828   22,920   21,871
                                            -------- -------- --------

  Eliminations of intersegment
   net revenue and other                       (274)    (261)    (301)
                                            -------- -------- --------

    Total HP Consolidated                   $22,554  $22,659  $21,570
                                            ======== ======== ========



(a) Reflects certain fiscal 2006 organizational realignments
    retroactively to provide improved visibility and comparability.
    For each of the quarters in fiscal year 2005, the realignments
    resulted primarily in revenue movement of $5 million or less
    between ESS and SW segments within TSG. In addition, IPG and PSG
    revenue was impacted at the business unit level but the overall
    segment revenue remained as previously reported. There was no
    impact to the remaining segments.



               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                  SEGMENT / BUSINESS UNIT INFORMATION
                              (Unaudited)
                             (In millions)

                                                     Six months ended
                                                         April 30,
                                                     -----------------
                                                       2006    2005(a)
                                                     -------- --------

Net revenue:

     Industry Standard Servers                        $4,936   $4,703
     Business Critical Systems                         1,826    1,890
     Storage                                           1,743    1,645
                                                     -------- --------
    Enterprise Storage and Servers                     8,505    8,238
                                                     -------- --------
     Technology Services                               4,714    4,853
     Managed Services                                  1,534    1,525
     Consulting & Integration                          1,401    1,421
                                                     -------- --------
    HP Services                                        7,649    7,799
                                                     -------- --------
     OpenView                                            433      335
     OpenCall & Other                                    201      175
                                                     -------- --------
    Software                                             634      510
                                                     -------- --------
  Technology Solutions Group                          16,788   16,547
                                                     -------- --------
     Desktops                                          7,423    7,359
     Notebooks                                         5,769    4,550
     Workstations                                        667      575
     Handhelds                                           345      479
     Other                                               222      279
                                                     -------- --------
  Personal Systems Group                              14,426   13,242
                                                     -------- --------
     Commercial Hardware                               3,394    3,243
     Consumer Hardware                                 2,238    2,305
     Supplies                                          7,609    6,882
     Other                                                28       27
                                                     -------- --------
  Imaging and Printing Group                          13,269   12,457
                                                     -------- --------
  HP Financial Services                                1,014    1,099
  Corporate Investments                                  251      238
                                                     -------- --------
     Total Segments                                   45,748   43,583
                                                     -------- --------

  Eliminations of intersegment
   net revenue and other                                (535)    (559)
                                                     -------- --------

    Total HP Consolidated                            $45,213  $43,024
                                                     ======== ========

(a) Reflects certain fiscal 2006 organizational realignments
    retroactively to provide improved visibility and comparability.
    For the period in fiscal year 2005, the realignments resulted
    primarily in revenue movement of $5 million or less between ESS
    and SW segments within TSG. In addition, IPG and PSG revenue was
    impacted at the business unit level but the overall segment
    revenue remained as previously reported. There was no impact to
    the remaining segments.



               HEWLETT-PACKARD COMPANY AND SUBSIDIARIES
                  COMPARISON OF DILUTED NON-GAAP EPS
      (Including the Effect of Stock-Based Compensation Expense)
                              (Unaudited)


                     Q105   Q205   Q305  Q405(c) FY05(c)  Q106   Q206
                    ------ ------ ------ ------- ------- ------ ------
Non-GAAP EPS as
 reported(a)        $0.37  $0.37  $0.36   $0.51   $1.62  $0.48  $0.54

Pro forma effect of
 SFAS 123 on EPS(b) (0.05) (0.04) (0.04)  (0.04)  (0.16)     -      -
                    ------ ------ ------ ------- ------- ------ ------
Total diluted non-
 GAAP EPS including
 the effect of
 stock-based
 compensation
 expense for all
 periods            $0.32  $0.33  $0.32   $0.47   $1.46  $0.48  $0.54
                    ====== ====== ====== ======= ======= ====== ======



(a) For each of the quarters in fiscal 2005, non-GAAP EPS includes the
    effect of compensation expense related to discounted options and
    restricted stock recognized under APB 25. Fiscal 2006 EPS includes
    the aforementioned expense plus the impact for stock-based
    compensation recognized under SFAS 123R.

(b) For each of the quarters in fiscal 2005, non-GAAP EPS as reported
    excludes the effect of compensation expense related to employee
    stock options and employee stock purchase rights under SFAS 123.

(c) In Q405, HP recorded $107 million of stock compensation before tax
    expense or $0.03 per share on an after tax basis within
    restructuring charges. This amount is excluded from the non-GAAP
    results shown above.




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