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By | Ashlee Vance 17th May 2005 23:11

New HP CEO coasts through mediocre Q2

Warns of large and lumpy future

Did Carly Fiorina leave new CEO Mark Hurd an HP on the verge of collapse? Not at all, as evidenced by second quarter results that saw most of HP's main businesses turn profits. Ominously, however, management warned that significant layoffs could be on order in the months to come.

HP posted revenue of $21.6bn in the period - a modest 7 percent rise over the $20.1bn posted one year earlier (and just 4 percent higher in constant currency). The company's net income came in at $966m up from $884m in 2004's Q2. The results were for the period ended April 30. Hurd took charge of HP on April 1.

"HP had a solid quarter," Hurd said. "Nevertheless, our overall performance leaves room for improvement in many of our businesses. We expect to provide details as soon as our plans are finalized that will move us toward that objective."

Some financial analysts had been looking for Hurd to writedown goodwill from HP's acquisition of Compaq. The CEO provided no word on such a move at this time.

CFO Bob Wayman did, however, warn that HP could be expected to take more charges in the future as a result of layoffs. HP has been firing workers in relatively small chunks over the past few quarters. That pattern could change for the worst.

"The feeling here is that with Mark coming in as a new CEO and an additional emphasis on getting the entire structure of the company in line that the magnitude (of layoffs) will be larger and lumpier," Wayman said.

Large and lumpy is never a good combination for employees unless you're talking about a holiday bonus.

HP's PC business posted a $147m profit on revenue of $6.4bn. That revenue total was 6 percent higher than last year's Q2 total, and the company enjoyed 12 percent higher shipments. In the same period last year, HP's PC unit reported a profit of $44m.

The star Imaging and Printing unit reported just 5 percent revenue growth to $6.4bn. This came as the business's profit fell to $814m from $952m. "This reflects $71 million in workforce reduction costs, hardware pricing actions, hardware growth and mix shifts within supplies," HP said. During the quarter, HP had 1,900 workers - many of them in Imaging and Printing - accept voluntary severance packages.

The company's Server and Storage unit posted its highest profit since the Compaq acquisition closed at $184m. HP's Xeon- and Opteron-based servers grew 12 percent, while higher-end systems were up just 2 percent and storage sales fell 6 percent.

"We have a lot of work to do in storage to get this business back on track," Hurd said, during a conference call.

HP also had $24m in workforce reduction costs from this unit.

The Services business increased revenue by 14 percent to $4.0bn, generating a profit of $292m down from a profit of $332m last year. HP's Software unit pulled in $277m - a 23 percent rise year-over-year. The business posted a loss of $6m, which compares to a loss of $52m last year.

HP expects third quarter revenue to come in between $20.3bn and $20.7bn.

"(The third quarter), as you know, is always a tough quarter for us," Wayman said. "Q3 is just a difficult quarter."

Management's reticence surrounding the third quarter spooked some analysts. HP noted that consumer and European spending tends to be down in the period. But the Wall Street pundits were more concerned about HP's ability to show stronger Printing and Imaging growth and to increase profits while making large workforce cuts.

Hurd, touted as a ruthless efficiency expert, reminded the analysts again and again that he would turn HP into a lean, mean machine. "What is clear . . . (is that) hard work lies ahead of us if we are to get HP's overall performance where it needs to be." ®

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