HP to report profit decline

The company is expected to report a decline in third-quarter profits, marking the second consecutive quarter in which they have fallen.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
3 min read
Hewlett-Packard today is expected to report a decline in third-quarter profits, marking the second consecutive quarter in which the computer giant's year-over-year profits have fallen.

Analysts will be focusing on whether HP is pulling away from or maintaining its earlier stance that revenue growth in the mid-to-high-teens is still possible for the company once its short-term troubles clear up. They will be paying particularly close attention to any signs that the company's PC business is stabilizing, looking to see if its average selling prices are remaining level.

Hewlett-Packard last month warned that its third-quarter results would be "flat to moderately lower" than the previous year.

Analysts largely seem to be expecting the latter. First Call's consensus of analysts' estimates pegged HP's earning for the third quarter at 54 cents a share, compared with 56 cents a share reported a year ago.

When the computer maker issued the warning, it pointed to Asia's economic turmoil and the industry's competitive pricing wars as the main culprits for its sagging profits.

In an effort to remedy that situation, the company announced last month that it would temporarily cut the pay of 2,400 managers by 5 percent and close its U.S. offices for four days during the Christmas holidays.

"I'll be listening for any spending reductions they've enacted," said Phil Rueppel, an analyst with BT Alex Brown. "I'd like to see if they have any more cuts targeted for sales and marketing expenses in relation to revenues, and whether they are going to reduce or redeploy people, and if they'll accelerate early retirement programs. That's been a traditional way for them to cut expenses."

He added that the company's sales and general administrative expenses represented 16 percent of revenues during the previous quarter. He said he would like to see that figure to drop to 13 percent or 14 percent going forward.

Richard Chu, an analyst with Cowen & Co., said Hewlett-Packard has for the last several quarters set up expectations of a revenue rebound in the mid-to-high teens, conditioned on its ability to move past its short-term problems.

"It will be interesting to see what direction or level of growth they are still encouraging people to think about," he said. "I want to gauge the sense of optimism or cautiousness they have for the next 12 months."

Shares of HP were up slightly in afternoon trading in anticipation of the earnings report. The stock was trading at 53.50, compared with Friday's close of 52.75.

A key indicator analysts will be watching for in today's report is the impact Asia's financial crisis has taken on HP's earnings thus far.

"I want to know if there is any indication that their exposure to Asia is minimizing, so it will not be a significant drag on earnings going forward," Rueppel said. He noted that Asia previously has accounted for more than 20 percent of HP's revenues, a figure that is likely to drop to the 15 percent range, he said.

"The company identified the Asia problem early on," Rueppel said, "But they were surprised by the extent [to which] their PC business has fallen off and inventory overstocked in the channel."