May 17, 2005 6:23 PM PDT

HP beats expectations, Hurd gives info on priorities

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

The company's net income increased 9 percent to $966 million for its first quarter under Hurd's management. The printing and imaging group remained HP's cash cow, with operating profits of $814 million, 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 April 30. That was a penny more than the average expectations of analysts surveyed by Thomson First Call and 3 cents more than last year's earnings per share.


Mark Hurd
CEO, Hewlett-Packard

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


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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 $20.3 billion to $20.7 billion, while analysts expect $20.35 billion, 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 May 1, 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 $177 million charge in the quarter for work-force reductions--$37 million 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.

The nitty-gritty
HP also released the following details:

• HP's printing and imaging group's operating profit declined from $952 million in the year-earlier quarter to $814 million. Color 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 $44 million to $147 million. Revenue increased from $6 billion to $6.4 billion.

• The storage and server group's operating profit increased from $119 million to $184 million. 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 $52 million to $6 million. "The bad news is that we have a software business with an annual revenue run rate in excess of $1 billion that is losing money," Hurd said, but the company expects it will become profitable by its fiscal fourth quarter, which ends Oct. 31.

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

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Burning the furniture wont generate HPQ sales & revenue.
I m a long-term holder of HPQ via Compaq crashing & burning, and will give new boy Mark a HONEYMOON quarter or two to show his stuff. I think Carly was doing well with HP-Compaq, just not well enough for Wall Street. I fault Carly for keeping the separate HP & Compaq product line marketing facade as I think it was not the way to take PC Systems market share away from Dell.

Hurd has a track record of gaming his numbers by promising modestly so that when mediocre numbers come in they look GREAT.

Cutting costs and head count is good business, as long as it is fat and dead wood being cut. But "burning the furniture" expense and labor cost cutting just to create false, inflated PROFIT numbers is not Great Executive Management&its Great Wall Street Gaming.

I have a wait and see attitude on CEO Mark Hurd as the market price of my HPQ stock awaits resurrection. JP B-)
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