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Hewlett-Packard Announces Sales Shortfall, Fires 3 Top Executives

Posted on: Friday, 13 August 2004, 06:00 CDT

Aug. 13--Hewlett-Packard shocked Wall Street Thursday by announcing disappointing sales and profits even as some of its top competitors are thriving.

HP Chief Executive Carly Fiorina blamed a series of internal missteps for the shortfall, which she called "unacceptable." She immediately fired three top executives. But some analysts said the poor performance reflected deeper problems raised by HP's $19 billion purchase of Compaq Computer two years ago.

In a conference call with investors, Fiorina said, "Execution issues cost us and therefore we are making immediate management changes." The financial bombshell came a week before the company was scheduled to release its earnings report. HP's stock tumbled 13 percent in response, taking $7.8 billion off the company's market value.

Already battered by warnings from Intel, Cisco and National Semiconductor, the Nasdaq fell to its lowest level in a year. Larger economic concerns related to rising interest rates, terrorism worries and high oil prices also are putting a damper on markets.

Underscoring HP's troubles was good news from rivals Dell and IBM on Thursday. Dell announced a 29 percent jump in profits, while IBM said it expects to hire 18,800 new employees this year.

HP's poor performance left analysts who follow the company jittery.

Some, such as UBS analyst Ben Reitzes, called into question the wisdom of HP's acquisition of Compaq in 2002.

Laura Conigliaro, an analyst at Goldman Sachs in New York, wrote, "We would not be rushing to buy. The call raised many additional questions about HP's execution capability, an area that has already been something of a yellow flag for HP." Fiorina said the company's server and storage group dragged down what was otherwise a good third fiscal quarter, which ended July 31.

In the United States, the group struggled to implement a new ordering system based on software from SAP. That left HP unable to deliver new servers, forcing the company to use expensive air freight and sales partners.

In Europe, the company suffered disruptions with its sales partners over compensation, aggressive discounting and a transition to a centralized claims process. HP also saw big price drops in its storage business as it waits for newly launched products to take off.

All those problems cost HP about $400 million in lost revenues and $275 million in lost profits. Earnings per share before special items was 24 cents a share vs. 23 cents a year ago. Analysts had expected earnings of 31 cents a share.

Thanks to strong performance in HP's printer, computer and services groups, HP's overall revenues were up 9 percent from a year ago to $18.9 billion. Net income was $586 million, compared with $297 million a year ago.

Fiorina wrote in a memo to employees that she replaced Executive Vice President Peter Blackmore with Chief Marketing Officer Michael Winkler as head of HP's enterprise division, dubbed the Customer Solutions Group.

She also fired Jim Milton, the consumer solutions group senior vice president for the Americas. Taking his place is Jack Novia. Kasper Rorsted, the consumer solutions group senior vice president for Europe, lost his job, which will be taken by Bernard Meric.

Those replaced were Compaq executives before the merger. But two executives taking their places, Winkler and Novia, also came from Compaq.

Tom Rosenwald, a partner at executive search firm Ray & Berndtson in New York, said the move to immediately replace the executives sends a strong signal that Fiorina will hold executives accountable. But it also is likely to take a toll on morale at the company and turn up the heat on Fiorina herself.

"If the company doesn't turn around, there is nobody else to blame," he said.

Martin Reynolds, an analyst at Gartner Group, said that HP has a quarter at most to fix the problems at the enterprise server and storage group. The group lost $208 million in the quarter compared with a $20 million loss a year earlier.

"There's this big black hole in servers," Reynolds said. "This is bad because it's the heart of HP's hardware strategy." HP was weak in sales of servers that are being phased out over time in favor of servers based on Intel's Itanium microprocessors. But HP this spring acknowledged that the Itanium strategy wasn't working as expected and embraced new chips from Advanced Micro Devices. That may have confused some customers and sent them to rivals such as IBM and Dell, which are both gaining market share.

A couple of analysts used the occasion to argue that HP might undo the merger and spin off the printer division that this quarter accounted for more than 90 percent of the company's operating profit.

But Crawford del Prete, analyst at International Data Corp., said, "I don't see this as putting pressure on the company to reorganize once again. If you look at where they are doing well in printers, PCs and services, many of those areas benefited from the merger." Fiorina blamed some of HP's troubles on a slowing economy.

But HP's rivals aren't experiencing the same problems.

"We think there is a healthy demand environment," said Dell CEO Kevin Rollins during a conference call Thursday. "This is about strategy, execution and management teams. When one company is gaining share, there is another company not gaining share." Dell reported a stellar quarter Thursday, with sales up 20 percent to $11.7 billion for the second-fiscal quarter ended July 30.

Sun Microsystems, HP's Silicon Valley rival, has its own share of problems. But Sun Senior Vice President Larry Singer said Sun is having success targeting HP customers who are confused about the company's technology strategy in servers.

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