May 14, 2002 4:30 PM PDT
HP tempers profit report with caution
"While a muted recovery in the second half is still possible, we are not counting on meaningful improvement in spending until 2003," said Chief Executive Carly Fiorina in a statement Tuesday.
The company didn't provide financial results for its future as a combined company with Compaq, saying it would reserve that information for a June 4 meeting with financial analysts.
HP wants sufficient time to explain the projections for the combined company, Chief Financial Officer Bob Wayman said in an interview. "We will provide restated pro forma information (and) lay out time frames of synergies and cost savings," he said of the June 4 meeting.
HP's net income of $252 million was a 436 percent jump from the $47 million in the year-ago quarter. Excluding one-time items, net income increased 48 percent from $336 million to $498 million, HP said.
However, HP's revenue of $10.6 billion was lower than the $11.1 billion expected by analysts surveyed by First Call and a 9 percent drop from the $11.7 billion in the same quarter in 2001.
HP met profit expectations by analysts, who predicted the company would report earnings of 25 cents per share on a pro forma basis.
The quarter ended April 30 was the second of HP's 2002 fiscal year and its last operating quarter as a standalone company before the conclusion of the $19 billion merger with Compaq.
In a conference call, Wayman disclosed some of the costs of the merger process. Of HP's $260 million in one-time charges in the quarter, $149 million were from merger costs, Wayman said.
Of that $149 million, "$75 million was directly associated with advertisements and proxy solicitation," the result of the drawn-out battle with Walter Hewlett, who spearheaded the effort to convince shareholders to block the merger.
HP's performance was good enough that the company will pay employees bonuses totaling about $220 million, Wayman said. "Because of poor performance in the last year or so, (the bonus program) has not paid out anything to employees. This half, we have performed better--not where we want to be, but considerably better," he said.
Improvements included better gross margins--a key measure of profitability--and HP's cash generation of $2.1 billion in the quarter, adding up to a total of $5.5 billion over the last three quarters, despite the bad economy. The company now holds $9 billion in cash and short-term investments.
HP said weak sales in computers and consulting were offset by sales in printing and imaging and by outsourcing work.
Fiorina in a statement acknowledged the challenges in closing the Compaq deal, but highlighted the company's success in pushing forward.
"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," she said.
Goldman Sachs analyst Laura Conigliaro expected revenue from the new HP to be 7.5 percent lower than what the two companies would have garnered separately, though HP has argued it will drop only 5 percent. Offsetting that decline, though, HP expects to save $2.5 billion a year through the merger.
HP stock rose 52 cents, or 3 percent, to $20.50 in trading Tuesday before the results were announced.
In other news from the conference call:
Corporate spending was down, and the end of the quarter showed some slowing consumer spending as well. "Sluggish corporate (information technology) spending and tough deal pricing once again characterized the enterprise market. The telecom and manufacturing sectors continued to be the weakest. Revenue in our enterprise business declined 5 percent" from the quarter ended Feb. 28, Fiorina said.
Consumer spending held up better, adjusted for a seasonal slump, but HP "did see some softness in consumer demand as the quarter progressed," Fiorina said.
HP notified another round of managers of their new roles in the post-merger HP, increasing the total of those who have gotten news to 1,000.
HP has sent out an early retirement program to 9,000 eligible employees in the United States, part of its effort to cut 15,000 jobs at the company. The company also has begun notifying employees whose jobs will be cut. Wayman said he expects the restructuring to cost HP between $1 billion and $1.5 billion.
HP ran out of components in some hot areas of the printing market, including photo printers and all-in-one devices that can scan and fax documents. The company is working with manufacturing partners to address the issue.
Profit margins in the printing business were good but not sustainable, Wayman said. Margins will be eroded by investment expenses from research and advertising on a new line of low-end printers, he said.
Storage systems were subject to particularly intense price competition.