February 17, 1999 7:00 AM PST

HP dips despite earnings surprise

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Shares of Hewlett-Packard edged lower in early trading despite yesterday posting better-than-expected earnings on $11.9 billion in revenues amid efforts to recast itself as an Internet company in 1999.

HP stock moved 2.48 percent lower to 68.75. The company's shares have traded as high as 83.88 and as low as 47.06 during the past 52 weeks. Yesterday, the stock fell 7.77 percent to 70.5 ahead of the earnings news.

HP reported earnings of 92 cents per diluted share, surpassing first-quarter earnings expectations of 83 cents per share based on consensus estimates from analysts surveyed by First Call.

The company managed to surprise analysts, who were expecting a decline from year-ago numbers of 86 cents per share. But cost-cutting, rather than revenue growth, was responsible for much of the surprise.

Compared to other high-technology companies such as Dell Computer, HP consistently reported lackluster results in 1998 due to ongoing difficulties in the Asian markets, which the company has significant exposure to. For the fiscal year ended October 31, net income showed a decline of 5.6 percent to $2.9 billion.

That compared with average profit increases of 46 percent a year from 1993 to 1997.

HP is showing signs of recovering from falling prices for printers and personal computers as well as slumping Asian economies that hurt its sales in 1998. HP said printers, personal computers, and services did particularly well during the quarter.

"Pricing as a whole has been pretty quiet and they are gaining market share in printers," said analyst Steve Dube of Wasserstein Perella Securities, who expected per-share earnings of about 80 cents.

On the down side, HP's growth has not picked up; the company is trimming costs to cope with lower revenue. Revenues grew only one percent from year-ago figures, and earnings were up a modest 3.3 percent to $960 million for the first quarter.

"We've achieved a good profit outcome despite softness in some of our businesses and weak revenue growth," chief executive Lewis Platt said in a statement yesterday.

Platt cited cost-reduction efforts and improved manufacturing as the key to HP's profit, while expressing disappointment that the company still hasn't met its internal growth objectives.

The company was hoping to show 10 percent growth in revenues for fiscal 1999, but with the upcoming quarter expected to show slow growth too, executives hinted that most of the growth is likely to come in the second half of the year, with a yearly target of 8 percent a more attainable goal now.

Asian market turnaround?
After earnings were hammered last year by a declining Asian regional economy, HP is seeing signals that the region is rebounding. The company reported that revenues in the Asia Pacific region grew 2 percent, compared to an 8 percent decline the same period a year ago. Those results compared to a 2 percent decline in the U.S. market.

"We feel good about prospects for improvement in the Asia-Pacific region, but we aren't ready to say a turnaround has really taken hold," Robert Wayman, HP executive vice president and CFO. Wayman did mention that orders in Asia were up 30 percent, and in Japan orders were up 10 percent, which he said was an indicator of the company's future prospects in the area.

Meanwhile, the company's declining revenues in the U.S. market were attributed mainly to the lack of a mid-range Unix server offering (as represented by its K series) in addition to having posted "exceptionally" strong results a year ago.

HP looks forward to rest of 1999
HP can only hope that its first fiscal quarter of 1999 is the start of a more auspicious year as the company attempts to recast itself as an Internet company.

The hardware maker is looking to jump-start its PC division with the release of a new line of Vectra and Brio PCs that feature a space-saving new industrial design, as first reported by CNET News.com last week. To boost demand, the company is also launching a $100 million branding campaign aimed at business buyers.

In spite of the revamped PCs and image the company is trying to project, analysts say the company still faces hurdles in expanding sales to large businesses. Expanding market share in this arena is difficult because corporate customers are loath to quickly change vendors. The company is now looking beyond the PC market--as it is defined today--to enter emerging markets. To date, company executives say they have emphasized profitability over market share in the corporate arena, though that strategy may change this year, they noted in a conference call with financial analysts.

In the Unix market, where results disappointed this quarter, HP said it expects to start shipping a replacement for the current K-series servers by the end of the quarter, although sales results will mostly spill over into the second half of the year. Sales of Windows NT servers was exceptionally strong, executives noted, but they will continue to emphasize sales of Unix systems for more demanding applications.

Platt recently indicated that the company will start to shift into the emerging market for Internet appliances, with a partnership with Oracle being one of the first steps in that direction.

Bloomberg contributed to this report.

 

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