HP tops estimates, plans more job cuts

Buoyed by improvements in its computing businesses, Hewlett-Packard reports quarterly earnings and revenue that top analysts' expectations, but sees more layoffs ahead.

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Buoyed by profit improvements in its computing businesses, Hewlett-Packard on Tuesday reported second-quarter earnings and revenue that topped analysts' expectations.

However, on a conference call with analysts, HP CEO Carly Fiorina said that the company plans to eliminate thousands more jobs over the next six months. The company has already axed 16,600 jobs in the past year, out of the 17,900 cuts planned after its May 2002 acquisition of Compaq Computer, Fiorina said.

In addition to the remaining merger-related cuts, HP said it trimmed 2,300 additional jobs last quarter and plans to chop 3,500 more by October--including 1,200 in its high-end computing business. At the same time, it intends to add 4,000 jobs related to recent outsourcing wins and is giving raises to its employees for the first time in two years.

"Although we are pleased with the (progress) of our enterprise systems business, we still have more work to do," Fiorina said, adding that the services industry is also seeing weak demand.

HP said it earned $659 million, or 22 cents per share, on revenue of $18 billion for the three months ended April 30. In the same quarter a year ago, the company earned $252 million, or 13 cents per share, on revenue of $10.6 billion. However, those earlier results exclude the performance of Compaq.

Excluding certain charges, HP said it would have earned 29 cents per share. On that basis, analysts were projecting earnings of 27 cents per share on revenue of $17.7 billion, according to earnings tracking firm First Call. In February, the Palo Alto, Calif.-based company forecast earnings of 27 cents per share, in line with what analysts were projecting at the time.

"One year after the merger, we've reduced structural costs by $3.5 billion on an annualized basis. Our business model is generating a more balanced revenue and profit mix, and our operating cash generation capabilities--more than $2.5 billion this quarter--are proving to be stronger than ever," Fiorina said in a statement.

The technology giant did not give specific guidance for the current quarter, but said it was comfortable with consensus estimates that it would have revenue of $36.4 billion and per share earnings of 62 cents, excluding charges, in the second half of the fiscal year.

"We see no short-term catalysts for improvements in IT demand, but HP continues to execute well," Fiorina said in a conference call with analysts.

Breaking it down
As for the just-reported quarter, HP said it narrowed the loss in its Enterprise Systems Group--which includes servers, storage and software--to $7 million, down from $83 million a quarter ago. Revenue was $3.86 billion, up from $3.74 billion last quarter.

In its PC business, sales dipped slightly to $5.12 billion from $5.14 billion. The unit remained in the black, although profits dipped to $21 million from $33 million in the prior quarter.

The company would not provide last year's numbers for its business segments on either a combined company or a stand-alone basis.

Sales in the printing and imaging business fell slightly, to $5.52 billion from $5.61 billion. Profits, however, rose to $918 million from last quarter's $907 million result. In the services business, sales climbed to $3.03 billion from $2.96 billion in the prior quarter, contrasting operating profits, which declined to $301 million from $341 million.

HP's financing business had revenue of $501 million in the quarter, down from $517 million in the prior quarter, with profits climbing to $21 million from $14 million.

HP also listed a business category called "corporate investments" that had revenue of $84 million and a loss of $44 million.

Investing in the future
In addition to its operating units, HP posted a $12 million loss on investments and had $66 million in costs not allocated to a specific business. The company also had $234 million in restructuring costs, as well a number of various acquisitions related and other items.

A year after HP acquired Compaq Computer, many analysts praise the company for its cost-cutting but still question whether the company is any better

HP's integration success
Despite challenges ahead in services
and middleware, the company has done
a good job of digesting Compaq.

positioned to compete against IBM's breadth and Dell Computer's efficient sales model.

The job cuts are the latest moves in HP's efforts to tweak its strategy in the enterprise space, where it has been struggling to return to profitability. It shuffled some executives earlier this month, but said it remains on track to make money by the end of its fiscal year in October.

As for the overall economic outlook, Fiorina told analysts that it is different for different parts of the world.

"The U.S. appears to be stable, but (there is) no catalyst for improvement," Fiorina said. "Europe now appears to be beginning to weaken. Asia continues to move along here. We have seen no impact of SARS (severe acute respiratory syndrome) to date."

Melanie Hollands, president of hedge fund firm Koala Capital, said that HP's results and outlook are benefiting from a weak dollar as well as a lower tax rate.

"HP continues to endure weakening demand across most of its product segments and ongoing distractions from operations, as a result of reorganization," Hollands said. "Although HP has significant technology assets and a substantial base of stable, profitable revenue from both its printing and supplies segments, these positives appear all but offset by ongoing pressure from increased competition, commoditization, execution challenges and lack of strategic focus--which all comes within the context of a weak economy and continued declines in overall IT spending."

Hollands said she was not surprised that HP had announced further job cuts.

"Their cost structure is not yet competitive with Dell's, and there is a way to go on that front," Hollands said.