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HP beats the Street
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May 16, 2000: 8:57 p.m. ET
PC, server strength contribute to five cent surprise; Agilent meets target
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NEW YORK (CNNfn) - Hewlett-Packard on Tuesday reported a fiscal second-quarter operating profit that beat Wall Street's expectations by a nickel on revenue that was up 15 percent from the same period last year.
Before one-time charges, HP reported earnings from continuing operations of 87 cents per diluted share, during the period ended April 30. Analysts polled by earnings tracker First Call had expected the company to earn 82 cents per diluted share during the quarter.
Sales from continuing operations during the quarter rose 15 percent to $12 billion from $10.5 billion during the same period last year.
Including charges for items including its early retirement program, the spin-off of Agilent Technologies, stock appreciation rights and equity gains, HP posted net income of $935 million, or 79 cents per diluted share.
The quarter's reported sales and earnings and the comparison figures from the year-ago quarter, do not include results from Agilent Technologies, which makes test and measurement equipment for electronics, communications and health-sciences companies. H-P spun off Agilent in November.
UNIX server revenue up sharply
 Executives at HP in Palo Alto, Calif., attributed the quarter's better-than-expected results to strength in several key product areas, including personal computers and network servers that run the UNIX operating system which are designed to run Web sites.
They also said the company remains on track to post revenue growth of 12 to 15 percent this year, with the current quarter expected to come in "on the higher end of that range."
"We turned in very strong performance in our UNIX business," Carly Fiorina, HP's president and chief executive told analysts during a conference call Tuesday evening. "We now have a superb product lineup with more in the pipeline."
UNIX server revenue was up 26 percent, the company reported.
Analysts had seen HP's server business, which had been sluggish over the past year, as a wild card for its second-quarter performance.
"If you had talked to me this morning, I would have said I was pretty comfortable that UNIX servers would improve," said Phil Rueppel, an analyst at Deutsche Banc Alex Brown. "But I think they improved a lot more than most of us would have expected."
HP's notebook computer revenue increased 180 percent, while home PC revenue rose 85 percent.
HP's total PC unit growth was 57 percent, outpacing the total market growth of roughly 20 percent, Fiorina said.
"We're also beginning to see demand for our notebooks in Japan, which has been an untapped market for us so far," Fiorina said.
Overall, HP's revenue from its computing systems business - which includes home PCs, servers, workstations and mobile computers - rose 19 percent to $5.09 billion from $4.3 billion during the same period last year.
 There also had been some concern on Wall Street that the company's increased focus on lower-end consumer products such as home PCs and printers would eat into profit margins. While the company's cost of sales was 71.5 percent of revenue compared with 68.5 percent during the same period last year, gross profit margins as a percentage of revenue fell just slightly to 28.5 percent from 30.2 percent last year.
"The margin degradation that a lot of folks had been concerned about really wasn't as bad as people had thought," said Deutsche Banc's Rueppel. "Overall, things look very good."
Printing shows modest revenue gains
HP's printing and imaging business, the company's largest, posted more modest revenue growth during the quarter, rising 9 percent to $5.1 billion from $4.7 billion last year.
Those results, however, were weighed down by changes in its supply-chain management practices which reduced the amount of printing and imaging products in the distribution channel.
The growth in the printing and imaging business was attributed primarily to printing and imaging supplies such as ink and toner cartridges, which rose 18 percent during the quarter, Fiorina said.
HP's smallest line of business, IT services, grew 12 percent in revenue year over year to $1.8 billion from $1.6 billion.
HP (HWP: Research, Estimates) shares finished Tuesday's regular trading session up 4-1/2 at 138-1/2, a 3.4 percent gain on the day.
And the company's stock has come through the recent shakeout in tech stocks relatively unscathed, standing nearly 100 percent higher from its year-ago level.
Moving ahead, Fiorina said HP will continue to sharpen its focus on consumer sales of computing and imaging products. She also said the company has "several smaller businesses that we plan to divest over time," although she would not disclose any specifics.
HP also will continue its efforts to sell more of its products directly to customers rather than through resellers to increase profitability. Year to date, roughly 14 percent of computing systems revenue has been derived through direct sales, she said.
Agilent meets expectations
Separately, Agilent also reported its most recent quarterly earnings after Tuesday's closing bell. The company said it earned 36 cents per share during the quarter on revenue that rose 24 percent to $2.5 billion.
The 36 cents-per-share figure includes nearly 4 cents related to one-time gains from the sale of investments, putting the company's profit in line with the 32 cents per share analysts had expected.
Though the numbers met Wall Street's expectations, the company's earnings from operations, fell 11 percent to $214 million from $240 million a year ago.
"We expected that our earnings from operations would be lower this quarter due to costs and expenses related to branding and operating on our own," Bob Walker, Agilent's senior vice president and chief financial officer, said in a statement. "Our current fiscal 2000 branding plan continues to call for spending of around the $140 million we mentioned in February. While we have more work to do in establishing our brand globally, we have made good progress."
In fiscal 2000, Walker said he expects the company's net earnings to be a bit over 6 percent of net revenue. In fiscal 2001, he forecast 15 percent growth in net revenue, and net earnings approaching 8 percent of net revenue.
Agilent (A: Research, Estimates) shares rose 7-13/16 to 96, an 8.9 percent gain on the day.
HP, which currently holds 380 million shares, or roughly 84.1 percent, of Agilent's outstanding stock, said it will distribute all of those shares to HP shareholders on June 2. The Agilent stock will be distributed to HP shareholder in the amount of 0.3814 shares of Agilent for each HP common share outstanding, the company said Tuesday. 
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