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HP tries to hold tight amid wild ride

Some analysts are concerned that Hewlett-Packard, which reports earnings Thursday, could miss estimates for the second straight quarter and lower growth projections again.

    Could printers make or break Hewlett-Packard's ability to meet first-quarter expectations?

    That's the question the Palo Alto, Calif.-based company will answer Thursday when it releases fiscal first-quarter results.

    But some analysts are concerned HP could miss estimates--for the second straight quarter--and again lower growth projections. The company missed fiscal fourth-quarter projections by a dime.

    "It's hard to believe HP will deliver good news," Technology Business Research analyst Humberto Andrade said.

    Printers are one of the big concerns. Imaging products accounted for more than 40 percent of HP's fiscal 2000 revenue and about 71 percent of its operating income. But industrywide printer sales ran aground last year, IDC analyst Angele Boyd said, and the outlook isn't thrilling.

    "The printer market was terrible in 2000," she said.

    Unfortunately for HP, other concerns exist as well. The company saw a decline in server market share in the United States, according to a recent Gartner study. And analysts say that sales of Superdome, the company's high-end Unix server, may not be hitting expectations. In addition, HP is a huge player in consumer PCs, which has slumped.

    To top it off, institutional malaise prompted by HP layoffs and cost-cutting measures could begin to take a definite, though perhaps immeasurable, toll, some analysts assert.

    "HP's January quarter pre-announcement was only surprising in the magnitude of the miss," Goldman Sachs analyst Laura Conigliaro wrote in a recent report. She now forecasts revenue growth of just 6 percent. "The weak start to the fiscal year almost ensures that fiscal year 2001 revenue growth will be anemic."

    December's woes
    Like many other computer companies, HP in December issued a profit warning for its fiscal first quarter, blaming slow sales industrywide in the second half of 2000. HP reset expectations at 35 cents to 40 cents a share for the quarter.

    A First Call poll of analysts had previously expected the company to earn 42 cents per share and bring in $13.2 billion in sales. Analysts now expect the company to earn 37 cents per share on revenue of $12 billion to $12.5 billion.

    In part because of the industrywide PC sales slump, HP also lowered its revenue growth expectations from between 15 percent and 17 percent to the lower or middle single digits. HP's quarter ended Jan. 31.

    At retail, where HP sells the majority of its inkjet printers, industrywide unit sales dropped 7.6 percent during the fourth calendar quarter compared with a year earlier, according to PC Data. With average selling prices down 17 percent year over year, industrywide retail printer revenue plummeted 23 percent.

    "HP does great in printers, but the question is, How strong is the printer market?" Andrade said. "There is a strong correlation between printers and PCs. If PCs go sour, printing is going to go the same direction."

    With the U.S. economy spiraling downward, consumer and commercial computer sales stalled in late 2000, pummeling many manufacturers.

    HP surprisingly skirted some of the wreckage with good inventory management. The company in fact gained retail market share at the expense of Compaq Computer, said IDC analyst Roger Kay.

    "HP has executed very, very well on the retail side," he said. "They've done well with inventory and cash flow, but they've just been hit in the market like everyone else."

    Still, the PC market is shrinking.

    "It's laughable to me that they say one of their strategic objectives is the PC market," Dataquest analyst Jeffrey Hewitt said.

    At the same time, HP has been struggling to compete aggressively in the server market. While HP's Intel-based NetServer business is growing, sales of larger, more profitable systems have stalled or declined, Dataquest asserts.

    "On the server end, they're not doing well," Hewitt said. "They're losing ground continuously."

    During 2000, HP fell to fourth place in worldwide server sales and fifth place in the United States, according to Dataquest. Server revenue in the United States, for example, fell 12 percent last year, while all of HP's major competitors posted healthy gains.

    The outlook is grim as well. In a recent survey of 50 chief information managers, Merrill Lynch analyst Stephen McClellan found that most companies planned to increase technology spending by 6 percent in 2001, down from 12 percent last year.

    Siege mentality
    HP's slump has taken its toll on the company. Analysts dealing with HP on a regular basis describe a company besieged with aggressive cost-cutting measures on assumed frivolities--such as business travel and corporate expense accounts--and with layoffs of 1,770 workers.

    Some analysts report that HP is more reluctant to share information than in the past as the company hunkers down to push through tough times.

    "HP is very quiet lately," Andrade said. "It's a different company than it was three or four months ago."

    Some insiders acknowledge lowered morale and confusing messages from management since HP missed fiscal fourth-quarter earnings projections. They describe the company as a ship lost at sea without a compass.

    "There is too much uncertainty (about) where to go, and we're taking on water over here," said one employee who requested anonymity.

    Hewitt is perplexed by HP's inability to solve problems stemming from ineffective management.

    "Who is not awake over there at HP--on the board of directors--and not looking at things?" he asked. The Gartner analyst warned of organizational barriers creating customer confusion about what segments products are focused on. "They need to clean out those silos inside, break down those walls internally," he said.

    Fiorina's folly?
    The effects of the slowing economy may have pinched sales of HP's 32-processor Superdome server right out the gate. The company had banked on the high-end system, launched in September, to boost sagging server sales and help shift profit dependence away from printers and imaging products.

    But the timing of HP's profit warning indicates Superdome sales failed to meet expectations, analysts say.

    "We would tend to presume that HP's enterprise systems orders are probably more back-end loaded," Conigliaro said. "The fact that HP preannounced so early...suggests that the company was already very far behind in its enterprise system goals."

    Still, HP is not giving up on the corporate market. The company on Tuesday consolidated its 25 software products into two packages: OpenView and the new Netactions.

    Analysts estimate OpenView sales, for example, are growing about 25 percent annually, but note HP's software business is starting from a low base.

    Strangely, the slowing economy could give Chief Executive Carly Fiorina more time to fix HP's problems, analysts say.

    "A recession scenario might favor her because it gives her an excuse for how things are," Hewitt said.

    But the Dataquest analyst faults the company's seeming focus on boosting Fiorina over fixing fundamental problems, particularly in high-end system sales.

    "I see more press on Carly than HP selling solutions," Hewitt said. "Whoever has been pushing her from her press office is pushing her very well. But on the bottom-line results in the server end, she gets a failing grade, in my opinion."