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HP's changes double profits in quarter

Hewlett-Packard followed CEO Mark Hurd's leadership to another positive quarter this spring, as HP posted a 51 percent increase in profits for the second quarter ending April 30. Hurd's been given much of the credit for the company's turnabout in business performance, a shift toward focused enterprises and away from being everything to all customers.

Toward that goal of focus, HP announced it will consolidate its 85 datacenters into three cities in the US: Austin, Texas, Houston and Atlanta. Each city will host two datacenters. HP says the consolidation will allow it to reduce IT spending by about $1 billion. HP plans to use the datacenters to also showcase products and services. The plan includes a strategy by new CIO Randy Mott, hired away from Wal-Mart, to consolidate 784 HP databases into one data warehouse.

HP chose the locations based on availability and affordability of space, power and network bandwidth as well as a low probability of natural disasters. However, Houston evacuated more than 1 million people as recently as last September in the run-up to Hurricane Rita.

HP's press release reports each location will host two separate physical sites with more than 50,000 square feet of floor space within 15 miles of each other. HP 3000s continue to work on mission-critical applications in HP's data operations. The 2005-2006 cost-cutting at HP has been a Hurd trademark, delivering on the promises of improved business from Carly Fiorina-led merger with Compaq. HP's stock has gained 50 percent in share price since last year.

Revenues for HP's second quarter topped $22 billion, a five percent increase over the same period of fiscal 2005. Hurd is responsible for setting HP on a more focused mission that has boosted those revenues: sell big businesses everything they need for IT; remain focused on printing, adding printing services like kiosks and commercial printing; sell portable products like notebooks and handhelds to grow HP's PC business.

HP intends to remain in the PC business because its volume purchasing gives the vendor an edge in component prices for other computer products it manufactures. The company announced that its operating profits increased in its four major segments, including Enterprise Storage and Servers, (ESS) home of the Integrity servers designated to replace HP 3000s in the product lineup.

HP said that Business Critical Systems sales fell 7 percent year-over-year; Integrity server revenue grew 93 percent, but PA-RISC and Alpha sales dips caused the overall decline.

Hurd said the company is going to be driving sales in servers with initiatives and deals.

"We have been focused on driving margin expansion in Enterprise Storage and Servers," Hurd said, "and we’re pleased with the progress we have made. However, we need to do a better job driving growth and you’ll see us take actions in the form of pricing and go to market initiatives."

Operating margins increased 7.5 percent in ESS, 15.5 percent in the Imaging and Printing Group, 3.6 percent in Personal Systems (the PC and notebook group) and 8.9 percent in HP Services, where the remaining HP 3000 support business is housed (along with HP's lab staff for the 3000).

But while HP's market share in PCs rose 1.4 percent (at Dell's expense), revenues from HP Services fell 2 percent from last year's Q2, even while the service business became more profitable. Hurd's rigorous cost-cutting and layoffs — more than 15,000 employees will separate from HP in his plan over the next several years — are driving up the earnings. HP posted more than $1.4 billion in profit for its second quarter as well as record cash flow.

The layoffs are not across the board. Hurd reported that HP is hiring in its sales force, focusing on beefing up a unit which Hurd reorganized back into separate groups after Fiorina had combined it into a single unit.

As has been the case for many years, printing provided the largest share of HP's Q2 operating profits. 52 cents of every dollar of HP operating profits comes out of its Imaging and Printing group. Services contribute the next largest share, at 17.2 percent.

HP says it's on track for the company's first $90 billion fiscal year. It beat analyst estimates for profits and revenues for Q2, in some measure because Hurd keeps telling investors HP still has lots of changes to make.

"While we clearly have more work to do, we are building a stronger, more competitive HP," Hurd said on a conference call with analysts.