HP Earnings Shed Light on Merger

Aug 27, 2002

Michael Singer

The new and improved Hewlett-Packard Tuesday posted a its quarterly earnings for the first time since it officially merged with Compaq Computer.

The last time HP posted quarterly earnings, it did so as a solo company.

For its third quarter revenue, HP reported of $16.5 billion, compared to $18.2 billion on a combined company basis in the prior quarter. The combined company's revenue declined 9 percent, while pro forma gross margin increased from 25.5 percent to 25.7 percent. However, except for a number of items, HP reported a $420 million profit, or 14 cents per share.

A smattering of analysts with Thomson Financial/First Call estimated the company would show revenue of $16.8 billion and per-share earnings of 14 cents.

"Throughout our first 100 days, we've kept our eye on the ball," said HP chairman and CEO Carly Fiorina. "We're hitting all our integration milestones and are on track to meet our second-half targets. The top 50 contracts we won in the quarter totaled $2 billion in new long-term revenue, and we exit the quarter with almost $12 billion in cash and equivalents. While we have more work ahead, given the tough economy and a major integration, we've accomplished a great deal."

The company said the merger opened up an opportunity to advance its market position and invest in key technologies. The revenue declines in personal and enterprise systems were just what Hewlett Packard said it was expecting.

"As we approach the one-year mark of our merger announcement, the competitive landscape has, indeed, been transformed," said Fiorina. "We acted early and are moving through implementation, while our competitors are just now coming to grips with their own strategic and business model shifts. With our unique combination of standards-based platforms, advanced technologies, imaging and printing leadership, and world-class infrastructure services, we are more confident than ever of HP's opportunity to lead the industry."

Obviously with Compaq by its side, HP is making enough of a presence that it is rattling the cages of rivals like IBM and Dell Computer .

Threatened by H-P's services division, IBM went out and spent $3.5 billion in cash and stock to acquire PricewaterhouseCooper's PwC Consulting unit. Dell even got a little envious of HP's printing cash cow and appears ready to take the plunge into offering printers.

Currently, Hewlett-Packard is the No. 1 printer maker and the No. 2 computer maker behind IBM.

"Clearly the most difficult product transitions were in the enterprise space. We made tough decisions in all areas, from servers to storage to software," said HP president Michael Capellas. "Our industry-standard server and storage businesses sustained market leadership, and our services business continued to contribute significantly to the company's profitability. It's a promising start, and we're in a strong position to take the fight to the streets even harder, but we're mindful that there's much more to do."

During the quarter, the company smoothed out its personal systems product portfolio and introduced new Compaq Evo desktop PCs, five new notebook platforms and the world's first Itanium 2-based workstations. Key customer wins included Walt Disney Feature Animation's selection of Linux-based HP workstations for its next-generation digital animation; and a $35 million U.S. Internal Revenue Service computer contract.

Overall, HP said its business-critical servers revenue was down 31 percent over last year and down 13 percent sequentially. Industry-standard servers revenue was down 18 percent over last year and down 4 percent sequentially. Revenue in storage was down 15 percent year over year, less than half the decline of HP's nearest competitor, and down 10 percent sequentially. Revenue in software was down 21 percent year over year and 5 percent sequentially.

Highlights included continued strong Superdome adoption, up 9 percent sequentially in unit shipments; the 17th quarter of Linux market-share leadership for HP ProLiant servers; and announcement of a strategic partnership with BEA Systems for middleware solutions. On the sunny side, HP was pleased with a joint $200 million contract with Reuters, Intel and Red Hat to make Reuters Market Data Systems available on Linux; and with partner Lockheed Martin, a $70 million contract with Air Force Material Command for technical services and data storage solutions.

The company also said it had identified 83 "must stop" IT projects and initiated 27 "must start" IT projects - most notably, its decision to modify its middleware lineup.

Fiorina has has been bullish on Hewlett Packard's outlook for the rest of the year.

For the second half of 2002 HP re-affirmed its second-half integration targets and said it expects overall revenues to reach between $35 billion to $36 billion. That would put its year-end revenues somewhere between $72.8 billion and $73.8 billion.

For the fourth quarter 2002, HP affirmed Wall Street consensus estimates of $17.4 billion in revenues and $0.22 earnings per share on a pro forma basis.

The computer and printer maker is also in the middle of cutting 10,000 jobs by November 1 and another 5,000 jobs next year, for a total of about 10 percent of its combined workforce. HP said it is also under a company-wide salary freeze until 2003.


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