Merger was the right thing to do- Fiorina

Duncan Martell

SAN FRANCISCO: Hewlett-Packard Co. has posted a quarterly net profit that met the most bullish Wall Street forecasts due to cost cutting and higher-than-expected revenue, and said revenue in the current quarter would rise slightly amid tepid holiday shopping.

The results and the outlook, which affirmed consensus analyst expectations, sent HP shares higher by 10 percent in extended trading. "There's nothing in this report you can quibble with," said Lehman Brothers analyst Dan Niles. "This was a quarter in which HP told people to expect profits to be up sequentially 50 percent and instead they rose 70 percent."

HP, the second biggest computer maker after IBM Corp., trimmed losses in its desktop and high-end computer businesses and reported record results in its lucrative printer division. HP also said it was running ahead of schedule in cutting costs and jobs after its $19-billion merger with Compaq in May and had practically finished combining the sales forces of the two companies. Fiorina said the results showed the merger, which had faced stiff opposition and skepticism from many on Wall Street, was the right thing to do.

"I'm prepared to say at this point it might actually work, and that may sound like faint praise but they are doing what they need to do to execute on the plan," said Gartner Inc. server and storage analyst Paul McGuckin, who described himself as a merger skeptic, of bringing the companies together.

HP, which has used the merger as a springboard to become a one-stop supplier for companies' technology needs, cut 12,500 jobs by Oct. 31, compared with a target of 10,000, and had cut costs by $651 million, against a goal of $500 million.

HP said it would eliminate 17,900 jobs by the end of fiscal 2003, including 1,100 positions that were cut as part of a voluntary program in the past quarter. It was the second set of combined earnings since the acquisition closed.

Consumer PC market remains ‘weak’

Shares in Palo Alto, California-based HP last traded at $18.55 on Instinet, up from a close $16.85 on the NYSE, after rising 30 cents in regular trading. HP reported net income of $390 million, or 13 cents a share in the quarter ended October 31. In the year-earlier period, the combined operations of HP and Compaq would have reported a loss of $505 million, or 17 cents a share.

Excluding a number of items, HP had a profit of $721 million, or 24 cents a share, at the high end of analyst forecasts which ranged from 21 cents to 24 cents. On a combined basis, year-ago profit was $238 million, or 8 cents a share. Revenue was $18.1 billion compared with $18.2 billion, assuming combined operations of HP and Compaq.

Fiorina said on a conference call with analysts that she expected the holiday-shopping season, which traditionally kicks off in late November, to be similar to the lackluster back-to-school-season earlier in the fall. "Back-to-school was about one-third below normal and that's kind of what we're planning for this holiday season," Fiorina said. "I think you should think about the consumer PC market as continuing to be quite weak."

Progress in key areas

HP said that revenue grew in each of its businesses and regions from prior-quarter levels. Revenues in HP's mainstay imaging and printing business surged 18 percent to $5.6 billion and its services business grew slightly. Operating profit in the group almost doubled to $926 million.

Sunil Reddy, portfolio manager at Fifth Third Technology Fund, which owns HP shares, noted the company had also trimmed losses in both the personal computer and high-end systems units, which was important progress. "Those are the two key areas," he said. The company also affirmed consensus Wall Street estimates for its fiscal first quarter of 27 cents per share pro forma profit on revenues of $18.4 billion.

HP posted an operating loss of $87 million in the fourth quarter in its personal systems business, which includes personal computers and notebooks. That loss was narrower than some analyst estimates of about $100 million. Revenue at the group fell 6.1 percent to $5.05 billion from $5.4 billion.

"For losing market share, they are not doing badly," said David Dreman, chairman of Dreman Value Management, who voted against the merger, of HP's PC business. In its enterprise systems business, HP posted an operating loss of $152 million, also less than what some analysts had been expecting. Revenue fell 5 percent to $4.07 billion from $4.28 billion.

Chief Financial Officer Bob Wayman said in an interview that while that business was stabilizing, it was "too soon to say that there's real growth there." Fiorina said that division and the personal systems groups would make money next year, but was not more specific.

(With reporting by Peter Henderson in Los Angeles)

© Reuters