Updated from May 20

Investors gave a hearty endorsement to H-P ( HPQ) after the company yesterday backed Wall Street's forecasts for the second half of its fiscal year, shrugging off the fact that the forecast implies meager growth. The company's latest guidance is for revenues to grow 1.5% from the first half, with earnings up about 7%.

H-P also outlined additional job cuts on top of the nearly 18,000 planned as part of the merger integration.

Despite the limited growth prospects, investors applauded the company's second-quarter performance, boosting it to hefty gains. In recent trading, the stock was up $1.18, or 6.9%, to $18.23.

But although H-P managed to best expectations on both the top and bottom line and outgrow rivals in the latest quarter, Wall Street analysts said they want to see a few more solid back-to-back quarters before they go bullish on the shares.

At Goldman Sachs, analyst Laura Conigliaro gives the company credit for "put ting anxieties to rest" by affirming Street consensus targets for the second half of its fiscal year, but injects a cautionary note. "That H-P shares represented the most appealing valuation within the group has not been questioned for some time," she writes. "What has been, and still is, in question is H-P's ability to sustain an upward move in the face of inconsistent results." She said she's keeping an in-line rating for now. (Goldman has done recent banking for H-P.)

"The key issue is whether the second quarter's good performance is another "one in a row" -- like the strong results in the fourth quarter of '02 followed by a weaker first quarter of '03 -- or whether this can be a trend," writes Bear Stearns Andrew Neff in a morning note.

On the upside, he notes, "H-P has made good progress on cost reductions, is now profitable in its PC business and losses in its enterprise business have narrowed significantly in the second quarter." On the downside, "Revenues still aren't growing, services margins have weakened and estimates for the second half of the year are back-end loaded with further workforce cuts/restructuring helping H-P meet EPS expectations." For now, Neff says he's maintaining his "peer perform" rating.

Others were more enthusiastic about the upside in the latest quarter. "A lot of people were not expecting much from H-P specifically, so their ability to beat top- and bottom-line estimates should be seen as pretty positive," says Robert Cihra, an analyst at Fulcrum Global Partners -- although, he added, "A lot of that is relative to the expectations, which have been low." Fulcrum does not do banking.

At the ( CHLAX) Choice Long-Short fund, manager Patrick Adams noted that without the 2% currency benefit from a weaker dollar, the company would have come up short on revenues. Nonetheless, he says the quarter was decent. "I won't buy the stock on a spike, but I will buy it," he says. "I'm not making a strong case, but I think the stock's cheap and we have the wind at our back in terms of earnings momentum for the sector."

Second-quarter sales at the hardware vendor totaled $18 billion, $300 million above Wall Street's $17.7 billion estimate and about 1% below last year's levels.

H-P generated net earnings of $659 million, or 22 cents a share, according to generally accepted accounting principles.

The EPS of 29 cents was 2 cents better than analysts' expectations, on a pro forma basis.

On an after-tax basis, the pro forma number reflects $141 million in amortization of purchased intangible assets, $126 million for various acquisition-related items and $234 million in restructuring charges. It also excludes a nonrecurring tax benefit of $131 million.

The company also said yesterday that it would reduce its payroll by a net 800 jobs in the second half of the year, from the current staff of 141,400 to an estimated 140,600. CEO Carly Fiorina said in the call that H-P is well on its way toward reaching last year's target for merger-related staff cuts of 17,900. As part of that plan, the company will make 1,300 more job cuts.

On top of those reductions, H-P continues to make strategic layoffs while adding staff in key areas like imaging and printing, managed services, and in offshore areas like India. H-P cut 2,300 jobs in the first half of the year and plans to eliminate another 3,500 jobs in the second half; but at the same time, it brought on board 6,800 new employees in the first half and plans to hire another 4,000 in the second half of the year.

"One year after the merger, we've reduced structural costs by $3.5 billion on an annualized basis. Our business model is generating a more balanced revenue and profit mix, and our operating cash generation capabilities -- more than $2.5 billion this quarter -- are proving to be stronger than ever," Fiorina said in a prepared statement.

On the conference call, Fiorina drew attention to H-P's sequential revenue growth. Though sales were up a mere 1%, helped along by two points of currency gains, she highlighted H-P's outperformance when measured against rivals. "We are pleased with our revenue performance not only in absolute terms but relative to our competitors. Our sequential revenues growth compares favorably with our competitors' results," said Fiorina, noting that in the most recent quarter IBM ( IBM) sales were off 15% sequentially; EMC ( EMC) was down 7%, Sun ( SUNW) down 4%; and Dell ( DELL) down 2%.

Signaling that the cost-cutting story is mostly behind the company, Fiorina said, "I feel confident saying H-P is no longer an integration story."

The growth outlook remains tough, though; in a separate comment she declared she saw "no short-term catalyst for an improvement in IT demand" and said there were "no signs yet of a large-scale PC refresh cycle taking hold."

"There is no killer app, there is no Y2K that will drive everyone to upgrade at the same time," Fiorina explained. Instead, she said customers are likely to upgrade based on their individual circumstances. "Frankly, I think that's the pattern you're going to see from customers going forward now."

The company didn't offer specific July quarter guidance, but instead affirmed Wall Street's consensus for the second half of fiscal 2003, endorsing estimates for $36.4 billion in revenue and 62 cents in pro forma earnings.

Meanwhile, CFO Bob Wayman cautioned investors to be aware of economic trends that could pose risks to the second half. "We expect the IT spending environment to continue to be challenging. Though there are signs of stabilization in the U.S. and Japan, spending remains weak with no clear signs of improvement. In Europe, the economic environment is showing signs of weakness. In Asia-Pacific, the economic impact of SARS continues to be unknown."

The current outlook implies growth of only 1.5% from first-half revenues of $35.96 billion.

"While some people may complain they're not showing a lot of revenue growth, you're not paying for revenue growth here," says Cihra of Fulcrum Global Partners, who has a buy rating on the stock. As of Tuesday's close, he points out, the stock was trading at only about 14 times expected '03 earnings. "This is first and foremost an earnings recovery story, and I think this quarter showed that that story is intact," he says.

By division, enterprise systems remained in the red but managed to reduce its operating loss to $7 million, down from an $83 million loss last quarter. Sales were up 3% from the prior quarter, led by a 7% gain in industry-standard servers.

The PC division stayed in the black for the second quarter in a row, with an operating profit of $21 million, while sales declined about 4% from the prior quarter.

Printer sales declined 1% from the prior quarter, but operating profit grew 1% to $918 million.

Services revenue grew 2% sequentially, though operating margins were down as a result of continued pricing pressure and increases in pension and benefit expenses. H-P also boasted in its release that it's now "firmly established itself as a major player in the managed services market," trumpeting a $3 billion managed services contract with Procter & Gamble ( PG) that was finalized in May, as well as two other contracts valued at a total of $700 million.