HP's new CEO Mark Hurd has been credited with HP's promising second quarter results which saw strong revenue growth in Europe, the Middle East and Africa.

Led by strong revenue growth outside of the US, HP reported revenue of $21.6 billion for its second fiscal quarter of 2005. These results were the first to be issued by HP since president and chief executive officer (CEO) Mark Hurd took the reins in late March, and they were slightly ahead of Wall Street's expectations.

HP said revenue in Europe, the Middle East and Africa grew by 10 per cent, year-over-year, to $9.1 billion for the quarter, which ended April 30. In Asia, revenue was up 9 per cent, to $3.6 billion. Both regions outperformed the US, which grew by just 4 per cent during the period, totalling $8.8 billion.

Generally acceptable

Overall, the company's revenue was up 7 per cent from the year-ago quarter. HP reported net income of $1.2 billion, or $0.33 per share, when measured using Generally Accepted Accounting Principles. (GAAP) When measured using non-GAAP methods, net income was $1.3 billion, or $0.37 per share.

Analysts had been expecting revenue of $21.4 billion and earnings per share of $0.36 on a non-GAAP basis, according to a survey conducted by Thomson First Call.

Hurd, who was credited with restoring the fortunes of his former employer, NCR, succeeded Carly Fiorina in late March, nearly two months after she was ousted by HP's board.

Room for improvement

HP's new chief executive sees "room for improvement," in many of the company's businesses, the company said in a statement. But HP did not provide any details on how that improvement may be achieved or when any major changes might be disclosed.

Any detailed discussion of any such plans would be "premature" at this time, Hurd said in a conference call after the results were announced. "At this stage, I have more work to do to get further beneath the operations of the company," he said. "What's clear to me already, even at this early stage, is that hard work lies ahead of us if we are to get HP's overall financial performance where it needs to be."

Much of that work, however will be directed at reducing costs within HP, according to HP executives. The company recently laid off nearly 2,000 employees in its combined Imaging and Personal Systems groups, and though HP declined to provide specifics on any future reductions, it said that the company expected to incur costs of $100 million over the next quarter related to workforce reductions across its different business units.


HP's Imaging and Printing business continued to generate the lion's share of profits within the company, with $814 million in income for the quarter. But this figure was $138 million less than the nearly $1 billion in income the group reported a year ago. Hurd said that Imaging and Printing would be one of the areas he focused on while developing a new operational plan for HP over the next several months.

Another area of focus will be the company's struggling storage business, which saw revenue decline 6 per cent year-over-year. HP plans to build up its storage specialist sales force to address this problem, Hurd said. "We certainly have to improve our profitability in that business as we go forward," he said.

Overall, business improved for the company's Enterprise Storage and Servers division. Revenue was up 6 per cent from the previous year, totalling $4.2 billion for the quarter. The company's Integrity servers saw revenue grow by 37 per cent year-over-year. Sales of the company's "industry standard" servers, which use processors from Intel Corp. and Advanced Micro Devices Inc.'s, grew by 12 per cent during the same period, HP said.

HP's Personal Systems group also saw revenue rise by 6 per cent, fueled by strong consumer sales and a 29 per cent increase in shipments in Asia. The group, which sells desktop, notebook and workstation systems, traditionally has operated on razor-thin margins. With $147 million in earnings for the quarter, the group's margins continued to be slim, but the results were much better than during the year-ago period. At that time, the division reported just $44 million in earnings.

In a spin

Though analysts have called on HP to spin off its Imaging and Printing or Personal Systems groups, Hurd made it clear that this is not on the agenda, at least for the moment. "I'm not working on a plan to spin a business or divest a business," he said.

One of Hurd's main challenges will be to develop a clearer strategic focus for HP, which sells a vast array of products and services. "We see a partly healthy printing strategy and little strategic thinking in the remainder of the portfolio," wrote Merrill Lynch & Co. Inc. analyst Steven Milunovich in a report published Monday.

"Most users don't want to see HP broken up, but they do want HP to find its differentiation," wrote Milunovich, citing a recent Merrill Lynch survey of 100 chief information officers (CIOs) in the US and Europe. Nearly half of the CIOs surveyed said that their commitment to HP had decreased over the past three years, and 56 per cent of them felt that HP's 2002 acquisition of Compaq Computer Corp. was not "smart."

Though layoffs still loom, Hurd did find one way to make a good impression on his new employees. Starting May 1, the company began a company-wide wage review, Hurd said. "It's the first time in two years, that there's been a salary increase for the workforce," he said.