H-P Sales Growth Quells Concern
Hurd's Cost-Cutting Helps
Push Earnings Up 26%;
Momentum, Size Matter
By CHRISTOPHER LAWTON
February 21, 2007; Page A3
Hewlett-Packard Co. answered questions about its ability to generate sales growth in the fiscal first quarter but raised some new ones about whether it can keep up recent momentum in boosting profit.
The company, known for computers, printers and other high-tech products, has benefited from a variety of restructuring moves begun in July 2005 by Chief Executive Mark Hurd that have increased profitability. H-P continued that progress in the period ended Jan. 31, reporting a 26% jump in net income.
In addition, H-P said revenue grew 11%, a welcome sign amid concerns the company's increasing size would make it increasingly hard to show meaningful growth. The Palo Alto, Calif., company was aided by solid results in several of its businesses, including personal computers, where it has taken back the No. 1 position from Dell Inc. and increased its profit margins.
"This was a solid start to the year," Mr. Hurd said in a conference call. "Revenue grew, margins expanded and we continued to take market share."
Mr. Hurd also announced another step to trim costs. H-P plans to freeze its pension plan for U.S. employees, and in July will reduce eligibility for its subsidized retiree medical program. H-P also plans to offer an early-retirement program, which it expects to be accepted by about 3,000 employees. Employees who don't take early retirement will benefit from an increased company contribution to their 401(k) plans, the company said.
H-P estimates it will record a $500 million gain from the pension-plan modifications, which would offset an expected charge from the early-retirement program.
• The News: Hewlett-Packard announced a 26% jump in net income on higher revenue, and unveiled new cost-cutting.
• The Background: The company has benefited from restructuring moves begun in July 2005 and has reclaimed the No. 1 position in personal computers from Dell.
• Outlook: Higher profits will depend on sales growth.
For the current quarter, however, H-P projected that earnings would be in the range of 57 cents to 58 cents a share, indicating a 12% to 13.6% drop from the year-earlier quarter -- which benefited from a settlement with the Internal Revenue Service. Without the settlement benefit, H-P projected profit will rise 11.8% to 13.7%.
The projection, analysts said, suggests that much of the benefit from reducing costs has been realized. Boosting profit further will largely depend on sales growth.
"Certainly H-P has done a great job over the last two years, and is in a good position to continue to do well over the next year and a half, but profit growth is slowing," said Brent Bracelin, an analyst with Pacific Crest Securities. He adds going forward that now, "It's all about share gains."
For the current quarter, which ends in April, the company put sales at $24.5 billion, indicating growth of about 8.6% from a year earlier. For the full fiscal year, it forecast sales of $98 billion to $99 billion, an increase of 6.9% to 8%.
The company's stock traded at 4 p.m. at $43.13, up 36 cents, in New York Stock Exchange composite trading. Following the announcement, the stock declined in after-hours trading by 38 cents, or nearly 1%, to $42.75.
H-P said it posted growth across all its businesses and all regions. In particular, H-P continued to make gains in the PC market against Dell, whose recent troubles triggered the departure of Kevin Rollins as chief executive and his replacement by Michael Dell, its chairman and co-founder.
Revenue in the company's personal systems group -- which includes desktop PCs and laptops -- grew 17% in the first quarter to $8.7 billion. Its operating profit margin increased to 4.7% from 3.9% a year ago.
Revenue in H-P's imaging and printing group rose 7% to $7 billion. In the company's enterprise storage and server group, revenue grew 5% to $4.5 billion. The company's software business, though relatively small, posted an 81% jump in sales due to its recent acquisition of Mercury Interactive Corp.
The company's results continued to show no ill effects from a scandal over an investigation of leaks from its board of directors, which prompted several government investigations and resulted last September in the departures of its chairman and two board members.
Separately, the nation's two largest public pension funds urged the company's shareholders to vote to let investors nominate directors on the company's proxy ballot. The California Public Employees' Retirement System and the California State Teachers' Retirement System both sent letters to as many as 7,500 investors asking them to support the proposal at H-P's annual shareholder meeting in March.
An H-P spokesman declined comment on the proposal.
--Kaja Whitehouse contributed to this article.
Write to Christopher Lawton at christopher.lawton@wsj.com
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