HP reports mixed results for 1st post-merger quarter

Profit meets expectations, but revenue falls short


Reporting its first quarterly results that included Compaq Computer Corp., Hewlett Packard Co. matched Wall Street's earnings estimates yesterday and fell a bit short on revenue.

The quarterly financial report also provided plenty of fuel for both sides in the continuing debate over whether the merger was a good idea or a bad one.

The new HP is showing that it is a proficient cost-cutter. Its lucrative computer printer business - whose contribution merger opponents warned would be watered down in the combined company - continued to thrive, generating strong profits.

The quarterly results also showed that the company has not made headway in solving the chronic problems in its basic computer businesses.

The personal computer business and, more so, its large computer operation showed sizable losses, losing market share to rivals including Dell Computer Corp. and International Business Machines Corp.

One of the central arguments in favor of the merger was that combining with Compaq would give HP the size and strength to fix those ailing businesses and restore them to profitability, once overlapping product lines were eliminated.

HP reported a loss of $2.03 billion, or 67 cents a share, for its fiscal third quarter, which ended July 31.

That figure included an after-tax change of $2.4 billion against earnings for a range of merger-related costs including revamping, provisions for severance payments and eliminating excess inventories after combining the product lines of the two companies.

Excluding the merger-related charges, HP reported a profit of 14 cents a share, which was the consensus estimate of securities analysts, according to research firm Thomson First Call.

The company reported $16.5 billion revenue for the quarter, slightly less than the Wall Street consensus forecast of $16.7 billion.

HP reported its earnings after markets closed. Its shares fell 64 cents, to $14.21, in regular trading but gained back 43 cents in the extended session.

$400 million trimmed

HP executives said the company was making solid progress toward meeting its goals for reducing costs in the combined company.

Operating expenses for the quarter were 10 percent, or $400 million, lower than they would have been in last year's quarter if the two companies had been one then.

The company trimmed its payroll by 4,740 employees during the July quarter and has eliminated 1,750 more jobs since the beginning of this month.

HP is on target to trim the payroll by 10,000 this year toward a total of 15,000 by next year.

With improvements in procurement, more-efficient manufacturing and cuts in the work force, HP executives say, they can achieve cost savings of $2.5 billion annually by the end of next year and reach $3 billion annually in 2004.

"Throughout our first 100 days, we've kept our eye on the ball," said Carleton S. "Carly" Fiorina, HP's chairman and chief executive.

"We're hitting all our integration milestones and are on track to meet our second-half targets."

Technology barometer

Given its size, presence in markets worldwide and stake in corporate and consumer businesses, HP is being closely watched as a barometer of spending trends in technology.

IBM remains a larger computer company, but it sells almost entirely to business customers. Roughly a quarter of HP's revenues come from consumer markets including home PCs, printers and digital cameras.

HP executives were guarded in their comments on the outlook for technology spending and when it might pick up.

"We're not economists," Fiorina responded when asked. "It is pretty clear that it is not going to happen in the second half."

Previously, HP had said that it expected that its revenue would rise 5 percent or so next year. But company executives declined to offer any guidance yesterday about their revenues for next year or when a pickup might materialize.

`Not seeing a turn'

"They're not seeing a turn," said Steven M. Milunovich, an analyst at Merrill Lynch & Co.

If the industry environment does not improve, or worsens, HP might make deeper cuts.

For now, the company is holding to its target of trimming the work force by 15,000.

"On the cost-cutting side the issue is going to be, `Is this enough?'" said A.M. Sacconaghi, an analyst for Sanford C. Bernstein. "That's an open question going forward."

The printer business remains HP's great strength. Revenues in the quarter were 10 percent higher than in last year's quarter at $4.7 billion. And operating profits from the imaging and printing business totaled $813 million.

In contrast, the PC business of the combined company lost $198 million as revenue fell 19 percent, to $4.8 billion.

And revenue at the unit that sells larger data-serving computers - the machines that run corporate computing networks and the Internet - declined 22 percent, to $3.8 billion.

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