HP counts on Web for profit revival

Hewlett-Packard is counting on the Internet to get earnings back on track, as the company develops devices consumers can use to harvest online data.

When Lewis Platt became Hewlett-Packard's chief executive in November 1992, the world's third-biggest computer maker was about to report a 27 percent drop in annual earnings.

Within a year, he had the company churning out profits the way it made its market-leading printers--fast and without a hitch.

Now, five years later, HP is in a rut. Many computer owners already own printers, buying new ones only when old ones wear out. With prices and demand falling for its other key products, such as personal computers and the powerful computers known as servers, HP last month reported its first annual decline in earnings since Platt took over.

Platt is counting on the Internet to get earnings back on track, as his company develops devices consumers can use to harvest information from the Web. It won't be easy, though. Not only is this budding market drawing formidable competition, but some people--including former HP executives--say the company has lost the drive that made it a Silicon Valley pioneer.

"They have to get back to what they do well: Invent things and sell them," said Kimball Brown, an analyst at market researcher Dataquest in San Jose, California.

Platt, 57, a bespectacled mechanical engineer with a master's in business administration from the Wharton School, and HP's other leaders see a day when an alarm clock connects to the Internet and wakes you up early when traffic is bad; a camera that zaps digital snapshots of the kids to grandparents over the Web; even a washing machine that knows when a water hose is leaking and sends an email to a repair shop.

"There is a wealth of appliances that can be done," Platt, a 32-year Hewlett-Packard veteran, said in an interview.

This month, HP started selling the first of these gadgets: A $700 handheld scanner that copies text and sends it by infrared beam to a personal computer for storage or to a mobile phone for emailing.

Handheld momentum builds
Other companies are moving in the same direction.

America Online, the nation's No. 1 online service, last month signed an agreement with Sun Microsystems, a maker of high-powered workstations, to design handheld, wireless devices that will surf the Internet without relying on a PC.

These are trying times for Palo Alto, California-based HP, whose net income rose an average of 46 percent a year from 1993 to 1997 while sales gained more than 20 percent a year. Compare that with the fiscal year ended October 31: Net income fell 5.6 percent to $2.9 billion and sales rose just 10 percent to $47 billion.

The company has already warned that first-quarter profit will fall and sales for the year won't meet forecasts, mostly because of weakening sales in Asia.

Shares up only 5 percent
HP shares, meanwhile, are up 5 percent this year, after rising an average of 30 percent a year since the start of 1993. The Standard & Poor's Computer Systems Index is up 54 percent since January 1, and shares of IBM, HP's archrival, have soared more than 60 percent.

HP shares recently traded at about 66.

Of the 31 analysts who track HP, 16 rate it "buy," 13 say "hold," and one says "sell"--hardly a strong endorsement given that "hold" is often a euphemism for "sell" on Wall Street.

Platt is taking aim at a market with plenty of potential, experts say. Worldwide sales of appliances that tap the Internet are expected to rise to $15.3 billion by 2002 from $2.2 billion this year, according to International Data Corporation, a market research firm.

Of course, HP will run into plenty of competition, putting pressure on profit margins, analysts say.

But cost cutting could blunt HP's technology edge. Last year, HP boosted research and development spending just 9 percent to $3.36 billion, compared with an average increase of 14 percent in the previous five years.

HP charged into the PC market in the early 1990s, shooting to No. 4 in U.S. sales from 17th in 1992, according to Dataquest.

The company needs another hit like that to get sales going again, analysts say, though at least one former HP executive says the company lost its edge during the fat years earlier this decade.

"HP has become the kind of place where you don't rock the boat," said Richard Belluzzo, 45, formerly HP'S No. 2 executive who quit in January to run computer maker Silicon Graphics.

Copyright 1998, Bloomberg L.P. All Rights Reserved.

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