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A new HP?
One week after Carly Fiorina's ouster, HP posts better-than-expected results, but stock slips.
February 17, 2005: 11:23 AM EST
By Paul R. La Monica, CNN/Money senior writer
An improving image? HP's stock has risen after the ouster of Carly Fiorina and seems poised to head higher due to bullish guiidance.
An improving image? HP's stock has risen after the ouster of Carly Fiorina and seems poised to head higher due to bullish guiidance.

NEW YORK (CNN/Money) - From the standpoint of Hewlett-Packard investors, the news just keeps getting better.

In its first earnings report after last week's surprise ouster of former CEO Carly Fiorina, who was heavily criticized for spearheading the merger with PC maker Compaq, HP reported sales and profits that topped Wall Street forecasts for the latest quarter. HP had said last week it expected to meet analysts' targets for the quarter.

The beleaguered maker of personal computers, printers and other products also issued sales guidance for the current quarter that was ahead of consensus estimates and earnings guidance that was in line with forecasts.

Shares of Dow component HP (Research) rose slightly after the market opened Thursday but quickly gave up those gains and was down about 1 percent in mid-morning trading. The stock is up nearly 3.5 percent since last week's dismissal of Fiorina.

HP said sales in its fiscal first quarter rose 10 percent from a year ago, to $21.5 billion. Analysts were expecting sales of $20.96 billion. The company said that favorable currency exchange rates helped lift sales by about 5 percent though. HP, like many other multinational firms, benefit from a weaker dollar.

Earnings, excluding special charges, rose 6 percent to 37 cents a share, beating consensus forecasts by three cents a share.

The company also said sales for its second quarter would be between $21.2 billion and $21.6 billion. The $21.4 billion midpoint is higher than Wall Street's consensus estimate of $21.1 billion.

And HP said earnings excluding one-time items would probably be 35 to 37 cents a share, versus average forecasts of 36 cents.

The rosy sales forecast was a particularly welcome development considering that networking equipment leader Cisco Systems (Research) and HP rival Dell (Research) both issued sales guidance for the current quarter last week that left Wall Street unimpressed.

"The outlook is bit of a surprise given the tepid guidance from Dell," said Brent Bracelin, an analyst with Pacific Crest Securities.

The good news from HP appeared to have little positive impact on other tech stocks though. Competitors Dell, IBM (Research) and Lexmark (Research) were trading lower Thursday, as were PC industry bellwethers Microsoft (Research) and Intel (Research).

Challenges remain

HP bulls have much to cheer. The company posted an operating profit in most of its major divisions in the quarter. The company's personal systems segment, which includes its PC business, generated operating margins of 2.1 percent, a vast improvement over the anemic margins of less than 1 percent in the same period last year.

And revenues in HP's rapidly growing tech services division were up more than 20 percent from the same period last year and nearly 4 percent from the fiscal fourth quarter.

But the software business reported a $40 million loss. And operating income in the company's printing and server and storage segments fell from a year ago.

Interim CEO Robert Wayman acknowledged that HP needs to do a better job of consistently generating profits.

"While we continue to make progress in growing our top line, there is work to be done to improve our profitability. As the board conducts a CEO search, our management team is focused on driving improved execution to serve our customers, strengthen our competitiveness and improve shareholder value," said Wayman, who is also HP's chief financial officer in a written statement.

Bracelin said that the fact that HP lifted its sales guidance but merely affirmed the Street's earnings forecast is a sign that the company may still be looking to gain market share at the expense of profits.

"The question for investors is what is HP chasing in terms of revenue and at what cost?" Bracelin said.

Along those lines, HP has faced increased competition from Dell in printing, which is the company's most profitable business. During a conference call with analysts, Wayman conceded that the pricing environment for printing was aggressive during the quarter.

Dell, IBM, EMC (Research) and Sun Microsystems (Research) have all been formidable challengers in the server and storage markets.

Competitors seem eager to capitalize on the turmoil at the company. Dell CEO Kevin Rollins said during his company's earnings conference call last week that Dell hoped to take advantage of any customer uncertainty that may be created by Fiorina's departure.

And in an incredibly bold move, Sun Microsystems ran an ad in Wednesday's Wall Street Journal urging HP customers to switch to Sun. The company also issued a statement criticizing HP for what it claimed was a lack of innovation.

"HP can't correct the systemic problems in its enterprise computing business simply by changing CEOs. There is no magic wand HP can wave to erase years of neglect and failure to invest in its IT business," said Larry Singer, a Sun senior vice president, in the statement.

Wayman did not give any specifics about the CEO search during the call. But market observers have mentioned MCI (Research) CEO Michael Capellas as a leading contender for the job. Capellas was formerly the CEO of Compaq and could be looking for a new job since MCI agreed to sell out to Verizon (Research) earlier this week.

Other potential candidates mentioned are Motorola (Research) CEO Ed Zander and IBM global services chief John Joyce. Two current HP executives -- Vyomesh (VJ) Joshi and Ann Livermore -- have also been named as possible successors to Fiorina, especially since they have both been given more responsibilities in recent months.

Joshi, a veteran of HP's printing business, was put in charge of a new unit that includes the PC and printing operations last month. Livermore, who had been the head of HP's services segment, was named the leader of a combined technology solutions division that incorporates the services, servers and storage and software businesses last May.  Top of page


Hewlett-Packard Company
Carleton S. Fiorina
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