Hewlett-Packard Surges to Head of the Computer Pack


Technically competent but a tad stodgy, reliably profitable but overstaffed and lagging in financial performance. That's the reputation that has dogged Hewlett-Packard Co. the past several years.

As recently as last fall, the venerable Silicon Valley firm seemed to be stumbling along its conservative path. Wall Street was in a snit over years of lackluster earnings, and company co-founder David Packard had re-emerged in an operating role amid speculation that Chief Executive John A. Young's tenure might be ending.

But like a marathon runner that jogs patiently in the middle of the pack before dashing past tiring front-runners, the $15-billion manufacturer of computers and instruments has suddenly emerged as a star performer in an increasingly troubled industry.

While International Business Machines faces another dismal quarter and Apple Computer and Digital Equipment struggle with slumping profits and layoffs, Hewlett-Packard is charging ahead with a series of impressive new computers and enjoying strong revenue and earnings growth.

Following the highly successful rollout of a new line of engineering workstations last month, H-P today will unveil mid-size computers that stand a chance of accomplishing what no such machines have been able to do before: stem the encroachment of personal computers into mainstream business computing.

"Of all the major computer companies, Hewlett-Packard clearly has the best strategy for the 1990s," said Robert Herwick, an analyst with Hambrecht & Quist in San Francisco. "They should have the best earnings and revenue growth of the group."

The basic strategy has actually been in place since the mid-1980s, when H-P bet heavily on a new type of computer design called reduced instruction set computing (RISC). At the same time, the company made a serious commitment to "open" computer systems that use a standard software called Unix for controlling basic functions.

Since then, RISC has swept the industry and is now touted as the long-term solution for everything from notebook PCs to supercomputers. And virtually every company in the business at least verbally pledges its allegiance to the concept of openness and some version of Unix.

Yet until recently, H-P was unable to capitalize on its foresight. The company struggled to convert its products to its RISC design--which Michael Slater, editor of Microprocessor Report, calls one of the best in the industry--and groped for a way to efficiently offer Unix systems without undermining its more lucrative proprietary systems.

The 1989 acquisition of Apollo, a manufacturer of high-performance desktop workstations, proved difficult to digest. Upstart neighbors Sun Microsystems and Mips Computer Systems stole the attention of the RISC enthusiasts and the open systems crowd. Like Digital Equipment, Data General and Wang Laboratories, H-P found that its mid-size, multiuser systems known as minicomputers were a tough sell in a personal computer-crazed world.

But H-P remained convinced that if it could offer top-flight workstations and minicomputers that took advantage of RISC and Unix, customers would come around.

"H-P has had the right picture and the right strategy for the last four or five years, but we have not implemented as crisply as we would have liked," said Chief Financial Officer Robert P. Wayman. "In workstations, we fell behind, and in the minicomputer area, some products were late." For several years, he acknowledged, the company was not meeting its plan.

On the surface, at least, the nadir came last October when the company was reorganized and 78-year-old co-founder and chairman Packard stepped back into a day-to-day role. The stock price wallowed, and analysts griped about the steady but slow cost-cutting efforts and wondered how long Young would last.

But in February the company announced better results for the first fiscal quarter and in March came the introduction of a blockbuster line of workstations that were more than twice as fast as those of competitors Sun and IBM. That was followed by a well-received "palmtop" personal computer, and second-quarter earnings came in strong as the company's 18-month-old streamlining effort began to bear fruit.

Now a newly confident H-P is charging ahead with low-priced minicomputers that are designed to lure customers who might otherwise opt for a network of PCs. Prices for the compact multiuser machines start at just $13,000, and some come with factory-loaded software--an unusual feature for anything other than a PC.

"We want to stop the encroachment of the PC into the minicomputer market," said Willem (Wim) P. Roelandts, vice president and general manager of H-P's networked systems group. "There's no inherent reason a minicomputer has to be more expensive than a PC."

The new systems represent the lower end of both of H-P's minicomputer product lines--one uses the Unix operating system and the other H-P's proprietary software--and can operate either as "servers," or hubs, for a network of PCs or as a kind of baby mainframe for small businesses or departmental data centers.

Just as it did with the new workstations, H-P will promote the minicomputers with an unusually aggressive advertising campaign that directly targets the competition. Initial "teaser" ads will feature performance comparisons that show H-P systems far outpacing those of IBM.

"We have to compare with IBM, but the ultimate victim is DEC. We want to push them out as the alternate computer supplier," Roelandts explained, noting that most companies buy from IBM and perhaps one or two other companies, with DEC normally holding the No. 2 slot.

"These products are going to knock the socks off some people," said Nancy Stewart, an analyst with the market research firm Dataquest. "H-P is going to be the target that everyone is shooting for."

Wayman, though cautious about the global economic outlook, expects that H-P will be able to continue the 10% earnings growth and 20% revenue growth posted in the first half. With H-P stock trading at around $50 per share--double its October level at a time when most computer stocks are plummeting--Wall Street could hardly be happier.

"They're hanging in better than most," said Timothy R. McCollum, an analyst with Dean Witter Reynolds. "Relative to the economic environment, they're doing a fabulous job."

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