May 2005

HP quarter lifts revenue, but dips future guidance

HP reported its second straight quarterly increase in revenues with figures for its Q2 of 2005, but the new CEO has warned investors the company is looking at a slower period that will end on July 30. Mark Hurd said in an analyst briefing that he plans more cutbacks at the sector which sells HP’s follow-up solution for 3000 customers who want to migrate.

Analysts called HP's 9 percent profit increase a solid quarter. Sales set a record for any HP quarter and rose a little more than 7 percent, exceeding expectations. But Hurd said Wall Street should lower its profit expectations for HP through mid-2005.

Enterprise Storage and Servers (ESS), the unit which makes the HP-UX servers on many migrating customers’ 2006 calendars, reported revenue of $4.2 billion, up 6 percent over the prior-year period. Windows-based systems led the way; HP said such “industry-standard server revenue” increased 12 percent, while the Unix-based business-critical systems (BCS) revenue grew 2 percent.

HP seems to be making some headway in its goal to transform half of its enterprise server business to the Itanium-based Integrity line. Revenue for the HP Integrity servers grew 37 percent year-over-year. HP wants to increase its Itanium-based server sales by more than 100 percent; the servers represented just one in five sales as of the start of fiscal 2005. HP-UX-related revenues, including operating system license sales, grew 9 percent.

HP’s ESS business, including its storage sales, stayed in the black with an operating profit of $184 million, up from a profit of $119 million in the prior-year period. ESS managed its profit even though the company spent $24 million in workforce reduction costs in the segment during the period.

The printer and imaging business gave HP elbow room to handle tougher results from its PC segment, but even HP’s cash cow had to cut back last quarter. Operating profit for printers and imaging was $814 million, down from a profit of $952 million in the prior-year period. This reflects $71 million in workforce reduction costs, hardware pricing actions, hardware growth and mix shifts within supplies.

“Our overall performance leaves room for improvement in many of our businesses,” Hurd said. He added that HP will be making more changes to itself to realize those improvements. “We expect to provide details as soon as our plans are finalized that will move us toward that objective,” he said.

HP began to break out its financials with details on consumer and commercial markets in this quarter’s report, indicating that it’s begun to see its sales in PCs and printers differently. Analysts have called for a spinoff of the consumer business at HP. PCs saw a better quarter, with three times the profits of last year’s Q2.

The company advised investors to expect about 20 percent less profits overall for the coming quarter, with revenues to be down about $1 billion. Hurd called Q3 one of HP’s toughest traditionally — perhaps a signal to migrating customers to hold out for the best deals of the year. He had a history of lowering expectations for financial results while at NCR’s helm.

After our reading of more than 75 HP quarterly releases, this quarter’s report showed a more conservative tone than any floated during Carly Fiorina’s CEO tenure. HP expects to improve its business position, but the latest report reminds investors and customers alike that such an expectation will take time to achieve. One thing looks certain — HP is re-evaluating all of its businesses’ value. Hurd told analysts the company is still considering a writedown for goodwill of the assets of the Compaq acquisition, a move that would devalue that signature transaction of HP’s Fiorina era.

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