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HP results beat expectations

Tags:
Profits,
Results,
Mark Hurd

Stephen Shankland CNET News.com

Published: 18 May 2005 09:55 BST

HP reported quarterly financial results Tuesday that were higher than analyst expectations, but newly appointed chief executive Mark Hurd began sharing information on what he thinks must be done better.

The company's profit increased 9 percent to $966m for its first quarter under Hurd's management. The printing and imaging group remained HP's cash cow, with operating profits of $814m, but that group was among several Hurd listed as needing attention.

Excluding unusual items, the company reported earnings of 37 cents per share for its second fiscal quarter, which ended on 30 April. That was a penny more than the average expectations of analysts surveyed by First Call and 3 cents more than last year's earnings per share.

HP's revenue of $21.57bn was a 7 percent increase from the year-earlier period, also ahead of analysts, who expected $21.36bn on average.

Hurd's top priorities
In remarks during conference calls with analysts and reporters, Hurd, who took over HP with about one month to go in the quarter, suggested operational refinements at the company rather than sweeping changes.

Among his top priorities: "driving printing and imaging forward; driving the breakeven point of enterprise storage and servers and addressing the weakness in our storage business; and driving profitability in managed services, consulting and integration, and software."

Hurd said improving HP's operations is an urgent matter. "We're in a sprint to get the company in shape to run a marathon," Hurd said. His predecessor, Carly Fiorina, was ousted amid pressure to pare back some operations or split the company.

But HP-watchers shouldn't hold their breath for more details. "You should expect to see an operational plan... in the next several months," Hurd said. "In reality, there's no quick fix to achieve the kind of results I think this company is capable of."

Changing top executives hasn't changed the company's challenges, though, according to Bear, Stearns analyst Andy Neff. "Despite HP's new leadership, our view is that it still remains a fundamentally disadvantaged computer company with suboptimal profits relative to Dell, pricing pressures across numerous business lines, and (profit) margin pressures in its printer franchise, where growth is slowing and competition is increasing from Dell's superior direct delivery model," Neff said in a research report.

Sanford C. Bernstein analyst Toni Sacconaghi was more optimistic. "We continue to view the risk/reward surrounding HP as attractive — the stock is cheap, on our estimates, with $4 per share in cash; profit improvement opportunities abound; and we believe that new CEO Hurd is worth betting on," Sacconaghi said in a research note.

HP will take a "bipolar" approach with dual goals, Hurd said. "We're in great markets with growth. We've got to seize that revenue growth. At the same time, we've got to get costs out," he said.

For the fiscal third quarter, HP said it expects earnings per share of 29 cents to 31 cents, lower than the 32 cents analysts had expected. Revenue is expected to range from $20.3bn to $20.7bn, while analysts expect $20.35bn, according to First Call.

HP chief financial officer Bob Wayman said the company's earnings per share this quarter declined 3 cents because HP gave pay raises, on 1 May, for the first time in two years. Among Hurd's priorities is "driving a performance-oriented culture", he said.

The company, which is cutting jobs in its storage and server group and its printing and imaging group, took a $177m charge in the quarter for work-force reductions — $37m more than it had forecast. The reason: About 1,900 employees in the imaging and printing group signed up for a voluntary separation plan.

"More employees accepted the severance in the second quarter than we expected," Wayman said.

Detailed results
Among HP's business segments:

HP's printing and imaging group's operating profit declined from $952m in the year-earlier quarter to $814m. Colour laser printer shipments increased 96 percent, and multifunction printer shipments increased 61 percent, HP said. Printing supplies revenue, however, grew only 4 percent.

The personal systems group, which sells PCs and handheld computers, saw its operating profit increase from $44m to $147m. Revenue increased from $6bn to $6.4bn.

The storage and server group's operating profit increased from $119m to $184m. Revenue from high-end servers increased 2 percent, but Itanium-based systems revenue increased 37 percent and now accounts for 21 percent of high-end server revenue. Blade server revenue increased 56 percent.

Storage fared poorly, though, with a 6 percent revenue decline. "We have not made enough progress in building out our specialist sales force, and we are not closing enough deals in the field. You can expect to see a lot of focus on this business in the coming quarters," Hurd said.

The software group's operating loss narrowed from $52m to $6m. "The bad news is that we have a software business with an annual revenue run rate in excess of $1bn that is losing money," Hurd said, but the company expects it will become profitable by its fiscal fourth quarter, which ends 31 October.

HP's services division saw operating profit decrease from $332m to $292m. For managed services, in which HP runs clients' computing operations, revenue increased from $609m a year ago to $771m, but that business lowers the overall services profit margins, HP said.