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HP climbs after beating expectations

Shares of Hewlett-Packard surge in early trading after it soundly beat Wall Street expectations yesterday.

Shares of Hewlett-Packard, a company the size of an aircraft carrier trying to become as nimble as a cutter, surged in early trading today after it soundly beat Wall Street expectations yesterday.

The company's stock jumped 5.49 percent or 4.88 points, to 93.64. Shares of HP set a new 52-week high by closing at 88.75 yesterday.

The computing giant reported earnings of 88 cents a share for the company's second fiscal quarter ended April 30, 8 cents more than the consensus of 20 financial analysts surveyed by First Call. During the same quarter last year, HP reported earnings of 65 cents per share.

Hewlett-Packard is undergoing dramatic change as it looks for a new chief executive to replace Lewis Platt and seeks to rally its tens of thousands of employees behind its "e-services" online campaign. HP intends use the strategy to benefit from the Internet, which the company acknowledges it was slow to embrace.

Profits came from PCs as well as printing and imaging products, Platt said in a statement yesterday.

Net income was $918 million, compared to $685 million in the same quarter a year ago. Revenue for the quarter rose to $12.4 billion from $12 billion in the same quarter a year ago, HP said. Of that, $5.4 billion was from the United States, $4.5 billion was from Europe, and $1.9 billion was from the Asia-Pacific region.

"The most notable weakness was revenue growth, which improved just slightly from Q1," said HP chief financial officer Bob Wayman in a conference call yesterday. However, he said, "This quarter, Asia was significantly better for virtually all of our businesses, including measurement."

The company's stock rose more than 5 percent yesterday in anticipation of the earnings report, which was released after the market closed.

BancBoston Robertson Stephens analyst Daniel Niles said in a report yesterday that HP likely would beat his firm's own estimate of $12.5 billion in revenue and 80 cents per share, spurred by successes of HP's new Unix products and printers. In addition, Niles said improving business with Asia is helping to turn around the fortunes of HP's test and measurement division, which is good news as the company prepares to spin off that division into a new company.

With the e-services plan, HP hopes to sell computers and services that will be the infrastructure of sophisticated business methods that rely on the Internet. HP also is investing in companies such as Bea Systems that sell other components of the Internet business transaction system, and in some cases will buy companies that sell Internet services.

Tomorrow, HP will unveil a technology code-named Fremont, software that helps glue together different services on the Internet running at different companies on different brands of computers.

Splitsville
HP is splitting itself in two, with the bulk of the original company focused on computers and imaging and keeping the HP name but getting a new chief executive. The test and measurement organization, under chief executive Ned Barnholt, will get a new name and be taken public.

Revenues for the test and measurement organization this quarter were down 4 percent compared to the same quarter a year ago, chief financial officer Bob Wayman said in a conference call today. However, orders for new test and measurement equipment increased 14 percent during the same period.

The split of the company will affect earnings next quarter, Wayman said. "We expect costs to increase notably in Q3," he said. "These costs will cover a range of activities, including outside consulting, legal costs, staffing for the two companies, and any restructuring that might result from the split."

During the splitup, HP's strategy is "to allow the businesses to stay focused on their customers and markets, while our 'infrastructure' people do most of the day-to-day work to create two companies," Wayman said.

CEO speculation
HP told analysts last week that a key to choosing the next CEO will be finding someone who can quickly take over the reins of HP's e-services push, said Kelly Spang, an analyst with Technology Business Research. For that reason, Ann Livermore, in charge of the company's enterprise solutions group and most of the e-services push, is a top pick, she said.

"I think the CEO search is going to be centered around e-services, and I wouldn't be surprised if Ann Livermore were the next CEO," Spang said.

Spang said HP so far has met the ambitious goals it set out for e-services, including numerous partnerships and investments with other e-services companies, a new high-end data storage strategy, and the Fremont technology. "Basically, they've met every single one of the objectives they laid out in March. They clearly have the momentum," Spang said.

In today's conference call, HP executives made little mention of the e-services plan, except to note that they don't expect revenue from the e-services investments until 2000 at the earliest.

HP also said its revenues from printers are strong.

Although the average selling price (ASP) for inkjet printers continues to drop, HP is making the money back on supplies such as ink cartridges, HP said. "The ASPs are coming down, but the supplies growth as been really phenomenal," one executive said today.

People printing out information from the Internet in particular has meant "more supplies usage, and that's the name of the game," he said.

There will be a transitional period in high-end data storage because of HP's deal earlier this month to resell Hitachi Data Systems storage systems under the HP label in favor of the earlier arrangement of reselling EMC systems, the company said. EMC has "access to our large accounts, and they could conceivably go in there," one executive said. But in the longer term, HP is pleased with the Hitachi deal.

N-Class servers ramping up
The N-Class servers will be ramped up to full production levels in June, about two weeks later than expected, executives said. While Unix server revenues were down, HP said Intel-based servers, particularly at the low end, did very well.

Niles looked favorably on HP's strategy, saying the company's e-commerce initiative "should help the company reposition to more effectively compete with IBM in this area."

HP is using the e-services campaign to pull the company together. For example, the e-commerce initiative was central to the unveiling of HP's new N-class servers last month and new models of its HP 3000 line of computers this month.

The servers are part of HP's effort to regain momentum from Sun Microsystems, a server company that analysts say has done well at branding itself as the company that sells the servers that power the Internet. IBM, which has said a huge portion of its revenues stem from e-commerce sales, also is a primary target.

HP even managed to wrap its printer division into the e-services plan with the acquisition of Dazel Corporation, a company whose software is the electronic middleman in the transfer of documents into and out of a company. The software needs to be able to work with many different printers, intercepting and redirecting print jobs to speed up the transfer of documents such as purchase orders.