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Can This Really Be Hewlett-Packard?

For years, Hewlett-Packard Co. () seemed locked into the role of computerdom's least likely to succeed. Caught in a no-man's land between hyperefficient Dell Inc. () and technology powerhouse IBM, HP became known mostly for epic earnings misses, a controversial merger with Compaq Computer Corp. (), and acrimony among employees and investors during the stormy reign of Chief Executive Carleton S. Fiorina.

Funny how a 40% rise in the stock price can change the mood. That's how much HP's stock has risen since April, when Mark V. Hurd moved from NCR Corp. () to take control of the Silicon Valley giant. Since then, HP has grabbed share in key markets such as PCS and storage gear, and shown crisp execution reminiscent of its glory days. In its most recent quarter, ended Oct. 31, HP beat Wall Street's expectations by 12%.

The most hopeful news for investors may be that all of the company's businesses are now profitable, after years in which its $25 billion printer business covered losses at the rest of the $87 billion company. The surprise tale of the ticker: HP shares no longer trade at a big discount to IBM and Dell, whose shares have fallen 1% and 17%, respectively, since Hurd took charge.

How did Hurd get off to such a fast start? Cost-cutting, in particular a 10% reduction of the workforce in August, has helped. But Hurd has brought operational focus to initiatives begun by the marketing-oriented Fiorina. For example, he arrived just in time to reap the benefits of vastly improved product lines in laptop PCs and storage gear -- two critical growth segments where the company has been particularly weak. Having largely integrated nearly a dozen acquisitions made over the past 18 months, HP's $1 billion software business turned a profit last quarter after years in the red.


Insiders are now waiting for Hurd to lay out his growth plans at a Dec. 13 analysts' meeting. One priority will be corporate computing. While it is a leading supplier of bare-bones servers, HP has been trying for years to increase sales of higher-margin software and services. Now, it will focus on helping companies simplify their sprawling tech operations with the use of management software -- even if it means selling less hardware in the short term as customers boost utilization of machines they already own. Another key initiative: selling more industrial-strength imaging gear to take share from large copiers and commercial-printing presses.

Plenty of challenges remain. HP has phased out its high-end server chip in favor of Intel's troubled Itanium family of processors. Rivals point to repeated delays and lowered performance specs on the Intel chips. "I think HP is in trouble," says Karl Freund, vice-president of IBM's high-end server business. "Customers are evaluating their options." And few analysts think HP can find new printer markets fast enough to compensate for falling demand and pricing on consumer models.

Still, it's a far cry from the dour mood of a year ago. Back then, investors, rivals, and even many insiders assumed HP was a sitting duck, too beset with internal problems to fight off nimbler rivals. Not anymore. "Mark has been busy getting the engine tuned," says director George A. "Jay" Keyworth II. "Now, we're turning our attention to growth again."

By Peter Burrows

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