HP Meets Earnings Expectations, but Future is Cloudy

Despite slumping sales, Hewlett-Packard Co. reported second-quarter income in line with Wall Street expectations, but HP executives warned that the outlook remains cloudy as IT spending continues to decline.

Despite slumping sales, Hewlett-Packard Co. on Tuesday reported second-quarter income in line with Wall Street expectations, but HP executives warned that the outlook remains cloudy as IT spending continues to decline.

While HP Chairman Carly Fiorina said the companys performance was in line with controversial projections it made during its bitter proxy fight to buy Compaq Computer Corp., she admitted that further weakening conditions could eventually undermine those forecasts.

Since the quarter ended April 30, the earnings report did not include revenue from Compaq, which the company acquired earlier this month.

"We are still performing within or better than" original revenue models, she said, "but we clearly have seen continued slowdown in IT spending and in, some categories, intensifying price pressure," which could undermine projections.

In a statement issued with the earnings report, Fiorina predicted that the high-tech industry may not see significant increase in sales until next year.

"While a muted recovery in the second half is still possible, we are not counting on meaningful improvement in IT spending until 2003," she said.

Despite the dour outlook, Fiorina announced that employees would receive the first bonuses awarded in 18 months, and praised workers for not allowing themselves to be distracted by the seven-month proxy fight with HP heir Walter Hewlett over the $19 billion Compaq acquisition.

"We stayed focused and executed well during a difficult quarter," Fiorina said. "In the final weeks of the quarter, 400 senior managers were named to their assignments in the new HP, and we were involved in a highly visible lawsuit. While there was real potential for distraction, HP delivered."

For the quarter, sales were down 9 percent from a year ago, to $10.62 billion, slightly lower than Wall Streets projections of $11.1 billion in sales. However, excluding one-time charges, earnings totaled $498 million, or 25 cents a share, which matched Wall Street consensus projections, according to Thomson Financial/First Call.

The showing was significantly better than for the same period last year, when it reported income $336 million, or 17 cents a share.

Including one-time charges, HP posted income of $252 million, or 13 cents a share, up from $47 million, or 2 cents, in the same period last year.

As it has for the past several quarters, HPs imaging and printing business was the companys strongest performer, with demand for its All-in-one devices, Photosmart printers and low-end LaserJet printers exceeding supply, resulting in shortages. Earnings more than doubled from the previous year, climbing to $768 million from $365 million.

HPs Computing Systems business, which includes workstations, servers, storage and software, continued to suffer as IT spending has yet to recover from a slump that began in the fourth quarter of 2000. The division posted a loss of $240 million for the quarter, compared to a loss of $122 million a year ago.

HPs Embedded and Personal Systems division, which includes PCs and handheld devices, also posted a loss of $106 million for three-month period, an increase of the $85 million deficit it posted last year.

IT services revenues declined slightly, but the division still posted earnings of $163 million for the quarter, a 6 percent decline from a year earlier.