News > Technology
HP profit up, sales down
The world's No. 1 PC maker misses sales targets, and its stock sinks after-hours trade.
February 25, 2003: 7:58 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Hewlett-Packard Co. Tuesday said earnings rose in the latest quarter but sales slipped in a tough business climate -- news that sent its stock sinking in after-hours trading.

The No. 1 personal computer maker reported earnings of 29 cents a share excluding one-time charges for its first quarter ended Jan. 31, up from 23 cents a year ago. According to First Call, analysts were expecting earnings of 28 cents a share on that basis.

Under regular GAAP accounting, HP said it earned $724 million, or 24 cents a share, up from $484 million a year earlier, before its merger with Compaq had been completed. Sales fell to $17.9 billion from $18 billion in the prior quarter and came in well below average forecasts of $18.5 billion.

Palo Alto, Calif.-based HP also affirmed Wall Street's average earnings forecast of 27 cents a share, excluding items, for its fiscal second quarter, which ends in April.

But during a conference call after the results were announced, CFO Bob Wayman said sales in the second quarter should be "flat to down slightly" from the first quarter. At $17.9 billion or lower, that would fall short of analysts' forecasts of $18 billion for the quarter.

Hewlett-Packard, like many other technology companies, has been plagued by a prolonged downturn in corporate spending on technology, and based on what Wayman and other executives said Tuesday, there still aren't many signs of a pickup in demand for tech products and services.

Big business still not spending

HP's (HPQ: Research, Estimates) stock, one of 30 in the Dow industrials, rose 43 cents to $18.18 in regular trading but tumbled 3.7 percent to $17.50 in after-hours trading, according to Instinet.

HP Chairman and CEO Carly Fiorina said that most of the revenue weakness was confined to the United States, since commercial spending remained weak.

"Today's world is full of uncertainty, and predictions are difficult. We're staying focused on what we can control -- maximizing our operating model leverage, delivering the best possible products and services, accelerating market share gains, staying on the offense and investing in growth," Fiorina said in a statement.

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In the conference call, Fiorina described current conditions as "a revenue-challenged IT environment." To that end, HP's enterprise systems division, which includes corporate PCs, servers and storage systems, saw sales drop 6.5 percent from the fourth quarter, while the unit lost $83 million, down from a loss of $129 million the prior quarter.

In another sign of weak corporate demand, sales and profits fell in HP's consulting services business from the fourth quarter as well.

HP's printing business continued to be the company's largest and most profitable, accounting for 31 percent of total revenue and 75 percent of total operating profit. But sales fell slightly from the fourth quarter and profit margins edged down to 16.2 percent from 16.8 percent.

Sales in the personal systems division, which includes consumer PCs, handhelds and notebooks, rose 2.1 percent from the fourth quarter, and the business managed an operating profit of $33 million, after losing $68 million in the fourth quarter.

Wall Street wants more than cost cutting

Still, even though HP did not give investors an upbeat forecast for overall tech demand, one institutional shareholder said the better-than-expected earnings proves that the merger integration with Compaq is continuing to be a success.

"They are doing a good job of consolidating the Compaq acquisition, and cost-cutting is the big name of the game for improved profitability at HP," said John Rutledge, manager of the Evergreen Technology fund. The stock accounts for about 5 percent of the fund's assets.

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But Kevin Hunt, an analyst with Thomas Weisel Partners, said that the merger integration story is getting old. The company completed the deal last May and has been neck-and-neck with Dell Computer as the leader in PC sales ever since.

During that time, Dell has been able to consistently generate sales growth, not just earnings growth, despite a tough tech spending environment, something that's clearly not lost on Wall Street, according to Hunt.

"The ability to have upside in earnings due to cost-cutting is diminishing," he said. "The focus on HP is going to start shifting from earnings to revenues." He does not own shares of HP and his firm has no investment banking relationship with the company.  Top of page

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