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HP warns earnings will fall short

Citing a slowdown in information technology spending, Hewlett-Packard says first-quarter earnings per share will fall several cents short of analyst estimates.

Stephen Shankland principal writer
Stephen Shankland has been a reporter at CNET since 1998 and writes about processors, digital photography, AI, quantum computing, computer science, materials science, supercomputers, drones, browsers, 3D printing, USB, and new computing technology in general. He has a soft spot in his heart for standards groups and I/O interfaces. His first big scoop was about radioactive cat poop.
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Stephen Shankland
3 min read
Citing a slowdown in information technology spending, Hewlett-Packard said Thursday that its first-quarter earnings would fall short of analyst estimates, with improvement in sales growth not expected until the second half of the year.

The company said year-over-year growth will be in the low- to mid-single digits.

HP said its earnings for the quarter ending Jan. 31 will be 35 cents to 40 cents a share. Analysts polled by First Call had projected earnings of 42 cents a share and revenue of $13.2 billion.

The warning doesn't come as much of a surprise. A host of Wall Street analysts have flagged HP shares based on concerns about a weakening economy. HP shares have weakened amid profit warnings from the likes of Dell Computer, Micron Electronics, Gateway and Apple Computer.

Wall Street has been skeptical of HP's growth guidance since last month's analyst meeting.

"Frankly, December was like somebody turned the lights out," HP CEO Carly Fiorina said in a conference call. The slowdown is in both corporate and consumer spending, not only with low-priced items such as PCs and printers but with higher-priced business goods as well.

"Consumer spending slowed below even our own conservative estimates," she said. "Clearly, consumer spending dropped more precipitously and earlier" than spending on higher-end products.

As for high-end software, servers, storage and services, "We are continuing to see growth, but given the change in market conditions, it is well below what we anticipated," she said.

To deal with the slowdown, Fiorina said, HP is "aggressively pursuing growth opportunities," focusing on higher-profit segments, holding back on hiring, making sure product introductions are handled well, and limiting inventory sent to sales channels.

Asked if HP is laying off employees, Fiorina said the company still is hiring employees who spur sales and fulfill orders.

One analyst's response to the news was, in effect, "I told you so."

"We noted that the company was probably aggressive in its assumptions" after the December forecast, when HP still thought it would meet expectations," said Credit Suisse First Boston analyst Mark Altherr. But Altherr said he remains enthusiastic about HP, saying the problems aren't specific to the company.

Buckingham Research analyst Jay Stevens expects revenue of $12.3 billion instead of $13.3 billion for the quarter ending Jan. 31, he said in a research note. He cut his earnings per share estimate from 42 cents to 37 cents.

Stevens predicted HP stock will open lower Friday, and that could bring down others as well. "Clearly, other companies are experiencing this same bookings slowdown, and other disappointments are expected," Stevens said.

In December, HP sent a memo to employees asking managers to delay salary increases, cut back on using temporary workers, and encourage employees to take vacation time, sources close to the company said.

The previous month HP had said it was on track to meet estimates, although it added that softness in the PC market had been "somewhat greater" than it originally thought.

HP said it was being conservative with its guidance and was staying focused on its earnings targets by cutting costs. The company projected gross margins of 27.5 percent to 28.5 percent. The company said it wouldn't provide targets for the full year.

Fiorina also defended the performance of the company's top-end Superdome server, saying it works well in real-world jobs. On Wednesday, Merrill Lynch analyst Thomas Kraemer called the performance "tepid." Sales of the product are in line with HP expectations, she said.