The Palo Alto, Calif.-based company reported earnings per share of 23 cents, excluding costs, which fell below the analysts' consensus estimate of 26 cents a share First Call reported. Revenue came to $17.35 billion, below the estimate of $17.46 billion. Earnings per share came to 10 cents, including costs.
The Personal Systems Group, which makes PCs, and the Enterprise Systems Group, which oversees storage systems and servers, were hit particularly hard, though nearly all HP's divisions experienced some difficulty. Personal Systems reported a $56 million loss, compared with an operating profit of $21 million in the previous quarter.
The decline was largely due to a mismatch between HP's forecasts for PC prices and component prices, especially in the consumer market.
"We took prices a little further than we needed to, particularly in relation to component prices, which did not decline as rapidly as anticipated," said Carly Fiorina, HP's CEO.
HP sells most of its PCs in retail outlets and hence can't take advantage of or protect itself against component price changes. The same dynamic hurt Compaq Computer when it was an independent company competing against Dell. Fiorina said HP sells 54 percent of its PCs to business customers in North America directly, like Dell, but only about 27 percent of HP's total PC sales go directly. Fewer than 10 percent of consumer sales are direct, she added.
The Enterprise Group, meanwhile, saw operating losses increase from $7 million to $70 million in part because of a decline in sales of midrange Unix servers. In services, consulting also did not fare well.
"We're not making money in that business (consulting)," said Bob Wayman, HP's CFO.
Even the printing and imaging group did not fare as well as in the past. Operating profit came to $739 million, or 14.1 percent of revenue. In the same quarter a year ago, operating profit was 17.9 percent of revenue, and last quarter it was 16.6 percent of revenue. HP calls the quarter's 14.1 percent operating profit a "more normal" level. Still, revenue grew 10 percent from last year to $5.24 billion.
"The third quarter is always tough, but we should have done better," Fiorina said in a statement. "Our challenge in personal business systems continues to be desktops, particularly in the U.S., where reduced volumes due to seasonality, and in some cases our own overly aggressive pricing actions, negatively impacted gross margins."
LCD (liquid-crystal display) screens were also a problem. HP underforecast the amount of LCD screens it would need and had to resort to shipping some in via air freight.
As a result of the disappointing numbers, HP slightly tempered expectations for its fourth quarter, stating that earlier expectations are now more of an upper estimate. The company said revenue would likely come in somewhere between $18.8 billion and $19.1 billion, while earnings per share would come at between 34 cents and 36 cents a share.
Layoffs will also be deeper than expected. In May, the company said it wouldby October, but the figure will now increase to 4,800, Wayman said. Concurrently, HP will also outsource more functions to India, China, Poland, Costa Rica and the Philippines, he said. More than 16,000 positions have been eliminated since the Compaq merger was completed in May 2002.
HP did not give specific guidance for the July quarter when it reported earnings last May, but it did say it was comfortable with consensus estimates for the second half of its fiscal year. In addition to looking for 26 cents per share for the quarter HP just reported, analysts were looking for revenue of $19.04 billion and earnings per share of 36 cents for the current quarter, which ends in October.
Fiorina, though, vowed that the PC group and the Enterprise Systems Group, which makes servers, would return to profitability in the fourth fiscal quarter. The three other HP groups reported a profit for the third quarter, which ended July 31.
Although slightly below expectations, revenue and earnings rose year over year. In the third fiscal quarter of 2002, HP reported revenue of $16.54 billion and earnings per share of 14 cents a share, excluding charges. Including charges, HP reported a loss of 67 cents a share.
There were some bright spots as well. Notebook revenue increased by 27 percent compared with a year ago. Sales of HP's high-end Superdome Unix server line grew by 64 percent, though midrange and low-end Unix sales were weak.