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HP's third-quarter earnings miss expectations

Posted on: Tuesday, 19 August 2003, 06:00 CDT

SAN JOSE, Calif. (AP) -- Hewlett-Packard Co.'s third-quarter earnings and sales failed to meet Wall Street expectations Tuesday as the computer giant continued to struggle with fierce competition from rival PC makers and weak demand for corporate systems.

Fifteen months after its acquisition of Compaq Computer Corp., the company blamed its lackluster performance largely on seasonal weakness and attempts to keep PC prices competitive. As a result, its personal systems unit posted a $56 million loss after two quarters of profits.

The third quarter, which ended July 31, also is typically the weakest for HP overall, said Carly Fiorina, HP's chief executive.

``The third quarter is always tough, but we still should have done better,'' she said. ``Nevertheless, we are confident in our strategy and the actions we're taking. We expect to deliver a strong fourth quarter with every one of our businesses profitable.''

The company predicted all five of its business units would return to profitability in the final quarter of its fiscal year, with revenues growing as much as 10 percent, to $19.1 billion, and profits ranging from 34 cents to 36 cents per share.

The forecast is at the lower end of analyst expectations of 36 cents per share on sales of $19.04 billion.

For the third quarter, HP earned $297 million, or 10 cents per share, compared with a loss of $2.03 billion, or 67 cents per share, in the same period last year.

Excluding special items, HP earned $700 million, or 23 cents per share. That compares with a profit of $420 million, or 14 cents per share, in the third-quarter of fiscal 2002.

Third-quarter revenue was $17.35 billion, up 4.9 percent from $16.54 billion posted in the same period last year.

Analysts were expecting HP to earn 26 cents per share on revenue of $17.46 billion, according to a survey by Thomson First Call.

The company said it was continuing to cut costs and jobs, though it continues to add positions in lucrative areas such as its imaging and printing business.

Martin Reynolds, an analyst at the research firm Gartner Inc., said HP needs to become leaner by cutting its operating costs since sales growth is likely to remain anemic.

``Obviously, they're not collapsing,'' he said. ``They're making progress but there are some problems and little wobbles in the course. The challenge is to fix that before the IT market returns to robust growth. Their great challenge is that if robust growth returns and they don't share in it, they're going to have big problems.''

The bulk of the shortfall stemmed from HP's overly aggressive PC price cuts, Fiorina said. ``We've already taken corrective pricing actions, and will return this business to profitability in Q4,'' she said.

During the bruising five-month battle leading up to $19 billion Compaq merger, Walter Hewlett -- the son of the late company co-founder William Hewlett -- argued the acquisition would increase HP's exposure to the low-profit PC business.

Still, there were some bright spots.

HP said its printer and imaging business showed 10 percent growth, though costs jumped 20 percent as the company increased research and development, marketing and other costs.

Earlier this month, HP unveiled 158 digital imaging and entertainment products that will be released in advance of the holiday buying season.

HP's consulting business posted revenue of $3.08 billion, up 5 percent from a year ago, and an operating profit of $337 million, up 1.5 percent over the third quarter of fiscal 2002. Executives credited improved revenue and results from restructuring.

Despite the restructuring, the server business did not fare so well. Though HP reported stronger sales of its high-end SuperDome servers, it had disappointing results from its mid- to lower-range Unix machines. The overall business was weak in Europe and Japan.

Fiorina said some of the unit's problems stemmed from restructuring, which she called ``the right decision for the long-term.'' The unit lost $70 million, compared with a loss of $7 million in the second quarter.

Shares of HP closed 2 cents lower, to $22.11 in Tuesday trading on the New York Stock Exchange. In after-hours trading, they lost $2.54, or more than 10 percent.

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Hewlett-Packard: http://www.hp.com

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