HP’s Results Draw Wrath of Investors
Overzealous discounting to gain market share led Hewlett-Packard Co. to report disappointing financial results Tuesday, sending the company’s shares plunging 10% in after-hours trading.
The Palo Alto-based high-tech bellwether said profit for its fiscal third quarter ended July 31 was $297 million, or 10 cents a share, contrasted with a loss of $2.03 billion, or 67 cents, in the same period last year. Sales of $17.3 billion were 5% higher than the $16.5 billion HP took in during last year’s third quarter, its first full quarter after completing a $19-billion merger with Compaq Computer Corp.
Excluding $403 million in adjustments for restructuring and other costs, HP said its profit would have been 23 cents a share. The consensus estimate of analysts surveyed by Thomson First Call was 26 cents.
HP’s corporate computer sales group continued to lose money, and its personal computer division fell back into the red after two quarters of meager profits.
“The third quarter is always tough, but we still should have done better,” Chief Executive Carly Fiorina said in a conference call with financial analysts.
Investors were harsh in their assessment, unloading HP shares in extended trading after the earnings report. The stock price, which dipped 2 cents to $22.11 in regular trading on the New York Stock Exchange, plunged as low as $19.68 before settling at $19.88.
“Investors are going to have a hard time forgiving them,” said Lehman Bros. analyst Dan Niles.
The most troubling sign for HP was that the desktop PC business returned to its money-losing ways. In large part, the merger with Compaq was designed to help HP better compete with Dell Inc. in the cutthroat PC business. After squeezing out a profit in the last two quarters, the Personal Systems Group, which includes PCs, reported an operating loss of $56 million.
Fiorina attributed the loss to “our own overly aggressive pricing actions,” which hurt HP’s gross margins. “We’ve already made corrective pricing decisions and will return this business to profitability in the fourth quarter,” she told analysts.
But Martin Reynolds, a technology analyst with market research firm Gartner Inc., downplayed the significance of the unit’s loss. When it comes to personal computers, he said, market share is more important for HP than profitability.
“The company has to fight Dell to at least a draw in the [PC] markets,” Reynolds said.
The Enterprise Systems Group, which sells computer systems to corporations, universities and the government, continued to lose money, posting an operating loss of $70 million in the quarter. That’s considerably better than the $252-million loss the group had a year ago. But analysts see the unit’s performance as a proxy for the success of the merger, and they are impatient to see it make money.
With enterprise sales, “the margins should enable HP to be profitable, so losing money is a big problem that needs to be solved,” Reynolds said.
The printer and camera business continued to power HP’s profitability, with operating earnings of $739 million. HP Services, the company’s consulting arm, reported an operating profit of $337 million.
The company doesn’t give net earnings for its individual divisions.
For the fourth quarter, Chief Financial Officer Bob Wayman said HP revenue would be $18.8 billion to $19.1 billion, with earnings before charges of 34 to 36 cents a share.
Last week, HP unveiled 158 new consumer products, including laptops, printers and scanners, geared to give the company a boost for the back-to-school spending season. Fiorina said the products had been “well-received.”
But Joseph Beaulieu, a technology analyst with Morningstar Inc., said the move was risky since it didn’t focus on corporate sales, which bring in more revenue.
“It’s a roll of the dice, especially since it’s concentrating on the consumer,” he said. “It puts a lot of pressure on them for January quarter sales.”
Reuters was used in compiling this report.
