HP shares dip despite beating estimates

Shares of HP lost $5.13, or nearly 4 percent, at $133.38 in early morning trading today. Shares in Agilent, a test and measurement company that HP plans to spin off, also fell in early trading. Shares sunk $8 to $80.50.

For its second fiscal quarter, HP reported net income excluding extraordinary events of $899 million, or 87 cents a share--a 17 percent increase from earnings of $766 million, or 73 cents a share, for the same quarter a year ago. Revenue grew 17 percent, from $10.5 billion a year ago to $12.03 billion.

"We are very pleased with our consumer PC profitability," chief financial officer Bob Wayman said in a conference call.

Chief executive Carly Fiorina added that the company wants to increase that profitability by selling more PCs directly to customers instead of through third parties, a sales method employed most successfully by Dell and Gateway. "We do believe we can continue to drive increasing profitability in the PC space with our accelerating direct model, and that particularly applies in the home PC category," she said.

Currently, 14 percent of HP's PCs are sold directly. In fiscal 2001, HP wants to increase that to 20 to 30 percent overall, Fiorina said. HP has several direct sales programs, including one for large accounts, a Web site for medium-sized businesses and kiosks in retail stores.

The company was expected to report earnings of 82 cents per share for its second fiscal quarter ended April 30, according to analysts surveyed by First Call/Thomson Financial.

The financial picture, however, is obscured by a number of extraordinary expenses and events, including expenses related to the Agilent spinoff and adjustments made to the company's early retirement program. In total, net income came to $935 million. The earnings-per-share number dipped because of an underlying change in the number of shares used in the calculation.

PC sales played a big role. Notebook revenue grew 180 percent, and home PC revenue grew 85 percent over the same period last year. HP recently surpassed Dell Computer as the fastest-growing big PC maker.

Like other companies, HP is seeing more income from interest and investments. HP posted a one-time gain of $45 million from sales of investments, the company said.

HP has "revitalized" its Unix server business, an increasingly feisty area dominated by Sun Microsystems, with new competition from IBM and Compaq Computer, Fiorina said in a statement.

Unix server revenue grew 26 percent from the same quarter the year before, HP said.

Analysts were more cautious about HP's Unix server business, in part because this quarter looks better next to a comparatively lackluster quarter a year ago.

"It is still too early to conclude that HP has turned the corner in Unix servers," Goldman Sachs analyst Laura Conigliaro said in a report. "Unix servers have been HP's Achilles' heel for over a year. The company is determined to erase the damage to its image from having lost the lead in the market."

Revenue growth for HP's midrange N-class Unix servers was strong, Fiorina said, but the top-end V-class sales were weak because of anticipation of its replacement, the "Superdome." HP executives have said Superdome is due late this summer or fall.

"The Superdome launch is on track, with over 16 customers signed up to act as alpha test sites," Fiorina said. And HP, unlike its competitors, isn't winning customers by selling at deep discounts or trading hardware revenue for services revenue, Fiorina said.

One definite weak spot in HP's hardware business was its new high-end XP256 storage products. HP dumped EMC for high-end storage a year ago, choosing to sell Hitachi Data Systems products under the HP brand.

"We knew the last year would be a tough year for us," Fiorina said. "We're still not satisfied with the results."

However, she added that HP is on track to meet its storage goals. "We want to be at the same revenue levels that (we) were at before the split with EMC, with double the (profit) margins." The storage business has a $500 million order backlog, Fiorina said.

Changes in HP's business practices reduced the revenue growth for its printing and imaging division, the company said. Revenue for this division grew 13 percent, but including effects of foreign exchange rates and a revamping of distribution designed to reduce inventory, that growth was actually 9 percent, HP said.

Printing and imaging--especially the recurring sales of "consumables" such as inkjet cartridges and coated paper--accounted for a significant part of last quarter's earnings.

While Sun chief executive Scott McNealy derides the business of printing and imaging, it was the biggest single component in HP's revenue, accounting for $5.13 billion in revenue.

Overall computing systems revenue grew 19 percent, from $4.28 billion in the quarter last year to $5.09 billion this year. Services grew 12 percent, from $1.6 billion to $1.8 billion.

Revenue in the United States grew 17 percent to $5.3 billion, while European revenue grew 5 percent to $4.2 billion. Asia-Pacific revenue grew 37 percent to $1.7 billion, and Latin American revenue grew 30 percent to $500 million.

The cost of goods sold increased 71.5 percent for the quarter because of the increasing sales of low-end printers and low-end home PCs combined with an unfavorable yen-dollar exchange rate, HP said.

The effect of the low-end sales is evident in HP's PC and notebook business. While PC unit shipments grew 100 percent, revenue increased only 85 percent. And while notebook unit shipments grew 248 percent, revenue grew only by 180 percent.