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HP earnings mixed

Hewlett-Packard reports a jump in fourth-quarter net income but misses expectations because of declining Unix revenues and growing operating expenses.

Hewlett-Packard (HWP) reported a jump in fourth-quarter net income today but missed expectations as revenue for Unix system workstations declined and operating expenses grew faster than the company had planned.

HP, along with competitor Silicon Graphics, has been hit with declining Unix workstation sales as Windows NT continues to take a bite of market share.

For the fourth quarter ending October 31, Hewlett-Packard's net profits reached $806 million, or 75 cents a share, missing analyst expectations of 77 cents a share, according to First Call. For the same quarter last year, HP reported a net income of $648 million, or 62 cents per share.

Revenue for the fourth quarter increased to $11.8 billion, up from revenue of $10.1 billion for the same period last year. The company said currency issues reduced the revenue growth by about 5 percent.

Meanwhile, costs and expenses, including research and development, grew 15 percent over last year, to $10.7 million.

"We're not satisfied with our performance on operating expenses, which increased too fast relative to our revenue growth," Robert Wayman, HP's chief financial officer, said in a statement. "We're working on several fronts to address this issue, including consolidations and closures of some facilities," he added.

Doug Van Dorsten, an analyst with Hambrecht & Quist, said HP's expenses were "substantially higher" than what he had expected, while revenue was in line with his expectations and margins were better than he had expected. He added that the company's results were helped by a weak Japanese yen.

Going forward, in the Unix workstation and sub-$1000 PC arenas, competition will continue to put pressure on margins, Van Dorsten predicted.

"It is a competitive world and HP needs to generate more orders and work hard to lower the rate of expenses while keeping margins up," Van Dorsten said. The challenge is not to cut expenses, but to limit the growth of expenses. The company needs to grow revenue at a faster rate than expenses, he added.

HP said that some of those challenges were met during the current earnings period. There was good demand for HP Kayak PC Workstations for Windows NT during the quarter, for example. Added revenue in the HP LaserJet printer business was flat compared with the year-ago period, but order growth in terms of units was strong. HP said revenue growth in the printer area was slowed by the company's work with channel partners aimed at keeping inventories and backlog in balance during product transitions.

The largest portion of the company's revenue comes from its computer business, where revenue increased 16 percent over last year's results and totaled $9.7 billion.

HP said its Pavilion family of home PCs achieved very strong growth, driven in part by acceptance of the company's sub-$1000 PCs. Pavilion's entry into European and Asian markets also helped fuel growth, the company said.

Revenue growth in HP's server business was strong for the HP 9000 V-class system, which helped stimulate demand for midrange and low-end systems, including the company's NetServer E-45 system.

Revenue in HP's test and measurement business rose 24 percent, with strong demand for semiconductor-test products and test equipment for RF and fiber-optic communications, said the company. Revenue for the components business increased 19 percent, due to a strong demand for wireless and fiber-optic communications devices.

Revenue in the United States was $5.5 billion, an increase of 17 percent compared with a year ago, while revenue from outside the United States increased 15 percent, to $6.3 billion. In Europe, revenue totaled $3.7 billion, up 11 percent. Combined revenue for the Asia Pacific, Canada, and Latin America regions increased 22 percent, to $2.6 billion.

For full-year 1997, HP's net income was $3.1 billion, or $2.95 per share, compared with $2.6 billion, or $2.46 a share, in fiscal 1996. Revenue grew 12 percent, to $42.9 billion.