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HP, sign of the hard times

The holidays at the computer giant were somewhat less than merry. Will more cutbacks be needed as a result of the Asian flu's lingering effects?

The holidays at Hewlett-Packard were somewhat less than merry.

Hit hard by the Asian flu, the computer giant launched a number of cost-cutting measures last year, ranging from offering voluntary severance packages to 3,000 employees to closing all of its corporate offices for four days during the holiday season.

Executive pay at HP was temporarily cut by 5 percent, and the distribution of doughnuts during company meetings also was temporarily put on hold.

But will more Trouble in the valley and more painful measures be needed in 1999 as a result of the Asian economic crisis' lingering effects?

HP derives a significant portion of its revenues from Asia. The region represented about 15 percent of the company's worldwide sales in 1997, and during the fourth quarter of last year, revenues from Asia fell by 20 percent, executives said.

"Asia is still affecting us to the degree that our growth has been affected," said Brad Driver, HP's investor relations manager. He noted, however, that European sales remain strong for the company.

Until recently, HP's Asian sales were growing in the mid-teen range year over year. But those sales have dipped into single-digit territory of late, largely thanks to the Asia financial crisis.

"We're still bouncing along the bottom," Driver said. "If any improvement comes [in 1999], it will be a slow ramp out."

He noted that the Asian impact--which he thinks may ease up, but not until May at the earliest--continues to be a major challenge for the company going into 1999, along with increasing competition.

Driver declined to discuss what measures HP might take this year to offset continuing sluggishness in the Asia-Pacific region, but analysts said the blue-chip technology company already has set the stage for ambitious cost-cutting in coming months.

For starters, HP is planning on widening the gap between its percentage growth in expenses and revenues, according to Larry Borgman, managing director at Josephthal & Company.

"In fiscal-year 1999, they want to open that gap to 10 percent, [but] I think there's some skepticism that they'll meet that," he said.

HP's Asia operations, meanwhile, are taking a cautious approach.

"We are not expecting a rebound in Asia anytime soon, The Asian-Pacific downturn hit HP at a time when it already had
tweaked its business model and was operating on lower profit margins. and so we are taking a conservative approach in our planning," said Cecilia Pang, communications manager of HP Asia-Pacific corporate relations in Singapore. "HP's commitments to the region are long-term. Our plans in dealing with the current economic situation will consider both the need to manage competitively in the short term, as well as our long-term business presence."

During the company's third quarter, when the Asia downturn hit hardest, HP tweaked its business model. Less emphasis was given to the test-and-measurement market--which includes semiconductor equipment as well as medical- and chemical-analysis equipment--and the company's focus on printers, PCs, servers, and workstations was increased.

"Their product mix has really changed. When you talk about printers and PCs, you have to operate on lower gross margins than they did with test equipment, so they are trying to get their overhead in line," Borgman said.

To that end, HP tried to cut costs in a variety of ways last year.

In one of its most notable cutbacks, HP in July 1998 imposed a temporary three-month salary reduction of 5 percent for 2,400 top-level managers. At the same time, the company announced it would close all corporate offices for four days during the week between the Christmas and New Year's holidays.

HP also announced last fall that it would offer buyout packages to 2,500 employees. The offer primarily was aimed at employees within the company's test-and-measurement organization.

Only 1,825 employees accepted HP's offer, and the company took a $170 million charge against earnings in its 1998 fiscal fourth quarter as a result.

Although that fourth-quarter reorganization was designed to position HP's once highly profitable test-and-measurement business to better reflect the current business environment, it also resulted in lower profit margins for the company. Those lower margins, coupled with weaker demand abroad for PCs and peripherals, led to the dramatic cost-cutting of 1998.

The cutbacks culminated in HP's offer last month to give voluntary severance packages to another 500 employees, who have until January 15 to accept.

The company also has curtailed some travel expenses.

"One of the most symbolic cuts was a trip to Asia the board of directors had planned that was canceled in September," said Brad Whitworth, an HP spokesman.

Meanwhile, employees at the company have taken it upon themselves to find ways to cut costs. With more than 124,000 employees, there's a lot of ideas to go around, said HP spokeswoman Suzette Stephens.

Among the cost-saving ideas posted on the HP intranet were: --Daniel Kunstler, J.P. Morgan Securities analyst saving disk drive storage capacity by deleting thousands of irrelevant email messages, sending packages via regular mail instead of using courier services or overnight mail, canceling second phone lines at home for dialing in to the corporate network, and recycling floppy diskettes that held outdated printer driver software.

Some of those ideas themselves were recycled, as the company implemented similar cost-controls during the mid-1980s.

Although many analysts commend HP for its belt-tightening, some say the company could have reacted more quickly. They also warn that HP still may need to reduce its workforce substantially.

"Here's a company that's continued to have two years of bad results and continued to increase its workforce," said Hambrecht & Quist analyst Doug van Dorsten. "HP's lines of business and approach to delivering products have changed, and the company's organizational structure has not really changed to reflect that."

Added Daniel Kunstler, an analyst with J.P. Morgan Securities: "Cost-containment works a little better when it's preemptive as opposed to reactive. Although HP's expense-control program is impressive, it falls in the reactive category."

Kunstler noted that HP began talking about significantly cutting costs as early as late 1997, but said that "the shortfall in revenue growth really outpaced those programs."  

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