HP meets expectations but warns of slow growth

The company matches lowered analyst expectations for its first fiscal quarter but tells investors to anticipate only single-digit growth in revenue this year.

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Stephen Shankland
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Hewlett-Packard matched lowered analyst expectations for its fiscal first quarter Thursday but told investors to anticipate only single-digit revenue growth this year.

The Palo Alto, Calif., computer and printer giant reported net earnings, excluding adjustments, of $727 million, or 37 cents per share. That represents a 12 percent decline from net income of $825 million, or 40 cents a share, for the same period a year ago.

HP warned analysts in January to lower their expectations. As a result, analysts expected HP to earn 37 cents per share, according to First Call.

Including extraordinary charges and expenses, per-share earnings were 17 cents. The one-time events included a $365 million charge stemming "from impairment of investments in emerging market companies" and a $102 million charge associated with the termination of 1,700 marketing positions.

For the quarter, the company had revenue of $11.9 billion, a 2 percent increase over the $11.7 billion of the same quarter last year.

"Clearly, this was a tough quarter and our results reflect that," Chief Executive Carly Fiorina said in a statement. Specifically, she blamed lower consumer and corporate computing spending and "deterioration in the U.S. economy." U.S. revenue declined 6 percent from the year-ago quarter.

On a conference call with analysts, Fiorina said her efforts to spur HP's server sales force partly backfired when HP salespeople started treading on the turf of sales channel partners that sell HP equipment. Unfortunately for HP, these conflicts occurred at the same time that HP was cutting spending on programs to help sales partners and competitors were increasing that type of funding.

The result: Some sales partners that once exclusively sold HP servers added competitors' products into their lines, Fiorina said.

To deal with the situation, HP is increasing funding for sales channel programs such as underwriting their marketing efforts, Fiorina said. In addition, the company has established a "hard deck" that separates what customers HP approaches directly from those that its sales channel partners target.

Also hurting HP's Unix server business is the fact that its high-end "Superdome" Unix server isn't generating money as fast as the company wanted. "We are not yet realizing significant revenues. The sales cycle is turning out to be longer than expected," Fiorina said.

Though many Superdome sales are in the works, high-end Unix revenue declined 54 percent compared with the year-ago quarter, HP said. Midrange Unix server sales increased 8 percent, while low-end Unix server sales increased 55 percent.

Unix server sales to Internet companies have dropped essentially to zero, the company said. On the other hand, HP is quite happy with its sales to large corporations. Revenue for these sales increased 26 percent compared with the year-ago quarter, the company said.

Overall, Unix server revenue, one of the segments Fiorina has promised to boost, grew by only 6 percent, slower than that of some competitors. A recent study by Dataquest showed that the company lost market share in servers.

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

For its part, HP said the economy deserved more blame than issues with its sales channel. Gartner has reduced its Unix server growth forecasts from 17 percent to about 8 percent, Fiorina said.

"The biggest issue is the economy," Chief Financial Officer Bob Wayman said in an interview. "HP has been through these kinds of adjustments. You control what you can control."

Although sales might improve in the second half, HP warned that it is too early to tell whether the economy will pick up.

"We are maintaining our revenue guidance for the second fiscal quarter in the low- to mid-single digits," Fiorina said in a statement. "We could see revenue growth improvement in the second half if the U.S. economy improves as some economists expect, and current foreign exchange rates hold.

"However, visibility remains extremely limited, and we are not counting on a return to double-digit revenue growth this year," Fiorina added.

European consumer spending is strong, but HP is concerned that problems in the U.S. technology market might spill into Mexico and Asian countries, including Taiwan, Korea, China and Singapore, Wayman said.

"The trouble that technology is having over here (could) be reflected in demand in some of those electronics-intensive Asian countries," he said.

Weak demand seems to have affected most of HP's subdivisions. Revenue from commercial PCs and Intel-based servers was down 11 percent. Home PC revenue was flat, while workstation revenue rose only 6 percent.

By contrast, notebook sales, historically one of HP's weaker divisions, were up 54 percent. HP's consulting business saw revenue grow 56 percent.

The United States proved to be the company's weakest region. Sales declined 6 percent. By contrast, revenue from Europe, which was a fairly stagnant market for the PC industry for most of 2000, grew by 6 percent and by 20 percent excluding currency fluctuations. Asia-Pacific revenue grew 10 percent, while Latin America revenue grew by 14 percent.

Printer sales were down 4 percent in the United States but up 5 percent internationally, the company said.