HP Bests Dell, Again

Under CEO Mark Hurd, Hewlett-Packard further distinguished itself from its main rival and exceeded analysts' first-quarter expectations

by Louise Lee

Hewlett-Packard reported first-quarter results that reflect companywide strength and continued market-share gains against rival computer maker Dell.

On Feb. 20, HP announced first-quarter results that exceeded Wall Street estimates. "We had a good start to the year," said Mark Hurd, Chief Executive of Palo Alto (Calif.)-based HP. He cited increases in sales, market share, and profit margins in core businesses such as printers and personal computers. Indeed, HP (HPQ) is currently the largest PC seller in the world, as measured by market share, having toppled Dell (DELL) from that position late last year.

Unlike Dell, which depends largely on the desktop and corporate markets for sales, HP is cashing in on high-growth areas, including emerging markets, the consumer area, and laptops. In HP's key PC business, revenue jumped 17%, including a 40% rise in notebook revenue, while operating margin rose to 4.7% of revenue from 3.9% a year ago. And in HP's printer unit, revenue grew 7% to $7 billion and operating margin increased to 15.3% of revenue, up from 14.9% a year earlier. "You should expect us to continue to balance revenue growth and profitability by managing our costs, investing in market opportunities, and levering our strength in notebooks, consumer, and emerging markets," Hurd said in a conference call with analysts after the earnings release.

Overall, revenue for the quarter ended Jan. 31 was $25.1 billion, up 11% from a year ago, and exceeded analysts' projection of $24.3 billion. Excluding certain one-time items, HP had net income of $1.8 billion, or 65¢ a share, from $1.4 billion a year ago and beating the consensus estimate of 62¢. Analysts agreed that HP's performance reflected healthy sales growth in the company's main businesses, coupled with aggressive cost cutting. "Overall, it was a very solid quarter," said Shaw Wu, analyst at American Technology Research.

Room for Improvement

Still, the generally rosy results included a few rough spots. Revenue in HP's storage business, which accounts for about 4% of sales, grew a scant 3% from a year ago. "We need to drive stronger top-line results in this business," said Hurd, adding that he plans to boost sales staff in that area.

And HP-owned inventory rose $600 million to $8.3 billion, another issue that caught analysts' attention. "Component pricing has been favorable," said analyst Wu. "Why load up on inventory?" Hurd in the conference call conceded that "we need to do a better job in inventory management, and you should expect us to work on reducing inventory levels going forward.…We're all over this thing."

HP appears unscathed by the scandal that erupted last fall over the company's investigation of board leaks. Neither the company nor analysts participating on the conference call mentioned the imbroglio that led to the departure of Chairwoman Patricia Dunn and other executives accused of using illegal means to uncover the source of leaked information.

Smart Moves

The results also highlight HP's differences with Dell, which in January ousted CEO Kevin Rollins after multiple earnings disappointments (see BusinessWeek.com, 2/2/07, "Dell's Not on Easy Street Yet"). By contrast, HP raised its financial estimate for the current quarter, which ends in April. HP said it expects revenue to be at $24.5 billion, representing about an 8.4% growth rate. It expects earnings per share, excluding one-time costs or gains, to be 63¢ to 64¢, compared with earnings of 54¢ a year earlier.

Hurd said that HP continues to reduce costs by consolidating data centers and making better use of real estate, among other moves. The company is also planning to stop contributing to its defined-benefit pension plan on Jan. 1, 2008, realizing a $500 million gain, which it expects to offset charges related to a voluntary early-retirement program. Although jobs vacated through that program won't necessarily be eliminated, HP may refill those jobs at lower pay. The company said workers who opt not to participate in the early-retirement program will receive greater company contributions to their 401(k) retirement accounts. Indeed, Hurd stressed several times that HP's efforts to cut costs are far from done: "We are transforming and are not transformed," he said.

Lee is a correspondent in BusinessWeek's Silicon Valley bureau.