Post-Merger HP Reports Net Loss of $2.03 Billion

Hewlett-Packard Co. on Tuesday reported a $2.03-billion loss for its fiscal third quarter in its first combined results since buying Compaq Computer Corp. in the largest technology merger in history, as sales fell in most of its product lines.

HP’s loss amounted to 67 cents a share in the three months ended July 31. HP said the combined companies would have reported a year-earlier loss of $116 million, or 4 cents a share.

Excluding $2.4 billion in merger costs, investment losses, litigation expenses and other write-downs, pro forma per-share profit came to 14 cents for the recent quarter, matching analysts’ predictions.

“We’ve kept our eye on the ball,” Chief Executive Carly Fiorina told investors and analysts on a conference call. “We did well.”

Revenue fell to $16.5 billion from $18.6 billion at the two companies a year earlier. The latest revenue was shy of Wall Street’s $16.7-billion consensus estimate.

Fiorina and other executives said HP was meeting a variety of internal goals set before the controversial acquisition of Compaq, which narrowly survived a shareholder vote. They said the sales shortfall resulted from continued weakness in technology spending rather than execution problems or excessive optimism about the merits of the Compaq acquisition.

Delayed purchases and economic conditions, especially overseas, put “the information technology sector under enormous pressure,” Fiorina said. “The shift in buying behavior will continue.”

HP stock fell 64 cents to $14.21 on the New York Stock Exchange, then regained most of that ground after the profit report, moving to $14.70 in after-hours activity.

The Palo Alto-based company said it was on track to meet earlier sales and profit forecasts for the year’s remaining quarter, and it said profit margins would improve as it chops more costs. The executives declined to give a sales forecast for the next fiscal year.

Sales of printing systems, the most profitable piece of the company, increased 10% to $4.7 billion.

But the rest of the quarter’s results were grim. Sales dropped 19% to $4.8 billion at the HP division handling personal computers for consumers and business. Revenue from big computer systems sold to large business enterprises fell 22% to $3.8 billion. And technology services, touted as a key rationale for the merger, saw sales fall 7% to $3 billion.

“The downside surprise was the enterprise computing,” said Merrill Lynch analyst Steven Milunovich.

“The revenue number was a little light, which suggests that even since June, the environment has deteriorated a bit,” Milunovich said. He doesn’t own HP shares and recommends the stock. Merrill Lynch provides investment banking services to HP.

HP President Michael Capellas called the big-computer division’s $422-million operating loss “unacceptable” and promised to speed up cost-cutting moves. The company has eliminated 4,740 jobs and plans to cut 15,000 by the end of next fiscal year.

“We know we have a lot of work to do, particularly in our PC and business enterprise systems,” Capellas said. He predicted the personal-computer division would return to profitability in the first half of next fiscal year.

The big-computer unit suffered the most from overlapping product lines between HP and Compaq, but other parts of HP also are under attack by competitors.

Chief PC rival Dell Computer Corp. is targeting more computer resellers instead of just selling directly to customers. Dell said this month it plans to sell its own hand-held computers and printers, where HP is strongest. And IBM Corp., leader in technology consulting, is buying PricewaterhouseCoopers to boost its strength in services.

Milunovich noted that HP’s first-quarter report card was marred by economic factors. “They’re off to a decent start,” he said. “They are doing a good job controlling what they can control.”