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Tech market indeed soft, but HP woes one of a kind

HP and Cisco spooked investors with recent comments about sales, but analysts say the overall tech market is still inching along.

Oil, war and economic uncertainty have dented the tech market, but it's not as bad as the news from Hewlett-Packard or Cisco Systems might indicate.


What's new:
Hewlett-Packard and Cisco have spooked investors with recent comments about sales. HP surprised Wall Street by announcing earnings a week early, reporting lower-than-expected income and an executive shuffle.

Bottom line:
The tech market started to slow a bit in June due to higher oil prices and interest rates, but it's still growing. HP's problems largely have to do with execution, analysts say.

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HP on Wednesday morning roiled the market by announcing fiscal third-quarter earnings of $586 million, or 19 cents a share--24 cents excluding one-time costs. That's well below the consensus expectations of 31 cents a share. The announcement was also a surprise in that HP wasn't due to issue earnings until next week.

Cisco, meanwhile, generally hit its financial expectations for its fourth fiscal quarter when it reported on Monday, but the company said sales would be flat this quarter. Since then, the stocks of the two companies, and of tech companies in general, have declined.

Analysts, however, have said the problems at HP have more to do with execution than an economic downturn.

"This is an HP-specific problem--this is not an industry problem," said John McArthur, an analyst who covers the storage industry at market researcher IDC.

HP particularly came up short with regard to sales of servers and storage systems. By contrast, storage specialist EMC recently posted 16 percent growth in its storage hardware business, while Dell and IBM have been relatively upbeat.

Dell, which is set to report earnings later Thursday, raised revenue expectations in July.

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Still, the news comes about a month after the market took a hit from a series of gloomy earnings reports coming out of the software sector, for reasons ranging from sluggish sales to less-than-perfect product planning and expectations that were too optimistic. Companies joining in the baleful chorus included Veritas Software, PeopleSoft, WebMethods and Siebel Systems.

"With oil and interest rates and Iraq, it seems like the operations people in big corporations are uncertain. They're saying, 'We're going to slow down a little bit," Gartner analyst Martin Reynolds said.

Nonetheless, "They (HP) have talked about how they have been fixing things, and then we get this pothole," Reynolds said. "They should have seen this coming."

Rivals offered their condolences.

"We see real demand in the marketplace," IBM spokesman Clint Roswell said. "Some of our competitors don't see that demand. But it might be about execution."

IBM said Thursday that it plans to hire 18,000 workers this year, a substantial increase over earlier forecasts.

HP largely acknowledged that many of the problems have to do with internal execution in a conference call and immediately announced an executive reorganization.

Nonetheless, some analysts have raised the issue of whether a quick fix is in the cards. Executive reorganizations are a common practice at HP. The company has also missed earnings in other quarters since its merger with Compaq Computer.

"I think that HP is in a fundamentally challenged position in that its strategy is to (offer) a third path between the efficiency of Dell and the scope and services that IBM has," Illuminata analyst Jonathan Eunice said. "It's a challenging valley to walk.

"Their comments on the softness of the quarter--you have to take that somewhat seriously," he added. "But when the economy is brought out as an issue, you just don't know if that's a little fig leaf for the poor results."

On the storage side, McArthur noted that rivals have shown strength in the areas where HP talked of weakness.

"IBM talked about growth in their midrange and their tape products, both of which HP talked about being down, specifically," he said.

HP's PC division also seems to be having difficulty. Revenue in the third fiscal quarter in its personal systems group climbed 19 percent because of a strong euro and growth in unit shipments. However, HP lost ground to Dell in terms of unit shipments in the second calendar quarter. HP has also lost notebook shipment ground in Europe to Acer.

By contrast, Cisco's problems are related more to the recent economic queasiness and the customer buying cycle. Cisco exceeded expectations in it fourth fiscal quarter, ended in July, reporting revenue of $5.93 billion, up from $4.7 billion the year before and beating analysts' expectations of $5.89 billion and well above stated company expectations of $5.62 billion in May.

Net income met expectations at $1.4 billion, or 20 cents a share, up from $982 million, or 14 cents a share the year before.

The stock declined, however, after Cisco warned that revenue would likely stay flat for the current quarter--the second half is usually stronger.

"Despite strong-order growth in some divisions, the guidance for next quarter is a lackluster 0 (percent) to 2 percent," Tal Liani, an analyst at Merrill Lynch, said in a research note to investors earlier in the week. "Our discussions with market participants lead us to believe that visibility is getting worse into the next quarter."

Although most agreed on the nature of HP's problems, analysts said growth will probably be moderate in 2004. Nick Wilkoff of Forrester Research predicted that IT spending would increase by 6 percent this year and 7 percent in 2005. On a positive note, a poll the company took in April indicated that about 30 percent of IT budgets this year are dedicated to new equipment or projects, up from 21 percent in 2003.

"There is a focus on new purchases rather than just keeping the lights on," Wilkoff said.

Gartner expects the tech market to grow at a moderate pace, about 7 percent to 8 percent this year.

Although that growth is slower than some might like, it could be good news, as higher growth could have put a damper on 2005 spending, Reynolds said.

CNET's Martin LaMonica and John Spooner contributed to this report.