HP Q4 results to be indicative of merger progress

By Duncan Martell

SAN FRANCISCO: When Hewlett-Packard Co. reports quarterly results on Wednesday investors will be looking for its personal computer and enterprise businesses to post narrower losses as it brings operations together with Compaq Computer, cutting costs in the process, analysts said.

HP's results also come on the heels of former President Michael Capellas' resignation last week to run WorldCom. Capellas had been seen as the hands-on executive at HP, and investors will be looking for confirmation that Chief Executive Officer Carly Fiorina can navigate both the merger-related integration and the downturn in technology spending without a clear Number 2.

Fiorina is seeking to position HP, with the help of a global advertising and marketing campaign, as a one-stop source for virtually all of a company's technology needs and pitting it more clearly against rival IBM Corp. "HP investors will be pleased with the (earnings) report," said John Rutledge, a portfolio manager at the Evergreen Technology Fund. "The company will do well on expenses and cost cuts."

When Palo Alto, California-based HP reported third-quarter results in August, it said it was comfortable with analysts consensus profit estimate of 22 cents a share. That figure remains the average estimate, according to Thomson First Call. A comparable year-ago number, adjusted as though the merger had taken place then, was not immediately available. "We think the merger integration is ahead of plan," said Dan Niles, an analyst at Lehman Brothers. "We feel really good about the company."

Since the merger closed in May, Fiorina has said that the integration of the two companies remains on track, and that the firm is hitting all of its milestones. In some cases, she has said, HP is exceeding them. In late October, Fiorina said that "the pattern of revenue loss and (market) share loss is very consistent with the assumptions we made, and sometimes we are doing better."

Slow growth in technology spending continues

Toni Sacconaghi, an analyst at Sanford Bernstein, wrote in a note to clients that he expected HP's fourth-quarter results to meet or exceed consensus expectations and that it would back current consensus expectations for a fiscal first-quarter per share profit of 27 cents.

Analysts polled by First Call expect HP to report a per-share fourth-quarter profit before items of between 21 cents and 24 cents on revenue of $17.3 billion. First-quarter estimates call for per-share profits in a range of 23 cents to 31 cents on revenue of $18.9 billion.

Fiorina also said in October that she expected slow growth in technology spending next year as corporations look to conserve cash and learn to use better the computers, software and networks they already have. HP has also said that it's on track to complete the layoff of 10,000 employees by Oct. 31, the end of its fiscal year, and had not seen revenue drop from merger-related issues more than it had expected. HP had forecast a 4.9 percent decrease in overall revenue associated with the merger.

As has been the case throughout the technology downturn in the last two years, HP's printing and imaging group has been its saving grace, and that business is expected again to be strong in the fourth quarter, Niles said. "The printer business is doing very well," Niles said, noting that HP's all-in-one printers helped business, because they have higher profit margins.

Niles also expects HP to trim its operating loss in its personal systems group, which includes PCs and notebooks, to about $100 million from an operating loss of $198 million in the third quarter. HP's loss in its enterprise systems group, which includes server computers used by corporations to help run networks, will narrow to about $250 million from $422 million in the third quarter, Niles said.

"Both of those businesses will be profitable by next year," Niles said. "The areas that have been giving them a lot of problems are improving."

© Reuters