December 3, 2002 5:10 PM PST

HP lowers revenue expectations

Hewlett-Packard on Tuesday lowered its revenue outlook for the current fiscal year, but said cost cuts are ahead of schedule.

HP said it expects revenue to grow between 2 percent and 4 percent this year, down from an earlier estimate of 4 percent to 6 percent growth. The company said its gross profit margins may be ahead of schedule, but said higher operating expenses mean that HP's operating profit margins will be between 6 percent and 7 percent, down slightly from the June outlook of 6 percent to 8 percent operating margins.

Although the revenue forecast was below HP's June projections, it was similar to or slightly better than what many analysts were forecasting.

"It's basically as expected," said Bear Stearns analyst Andrew Neff, noting that the economy looks worse now than it did in June. Neff said that the increased cost cuts would basically offset slightly lower growth to produce results similar to what most people are anticipating. "They're getting there a different way."

The new outlook was given to financial analysts at the start of a two-day meeting here.

HP also announced it expects $3 billion in annual cost savings by the end of the current fiscal year. That's a year ahead of the company's most recent forecast. Last month, HP increased the total number of merger-related job cuts to 17,900, up 1,100 jobs from a prior estimate and 2,900 more than the company's original forecast.

"I am not here to raise guidance today," CEO Carly Fiorina told analysts. "The economy continues to be uncertain. We want to make sure we are not getting ahead of ourselves. We feel good about where we are."

Fiorina said HP aims to have its PC business profitable by the end of the next quarter but does not see a profit in the current quarter. Although retailers enjoyed strong sales over the Thanksgiving sales period, she said, such sales were not necessarily a sign that the overall holiday season would be better than expected, given the fact that there are fewer shopping days between Thanksgiving and Christmas than in past years.

"It needed to be a good Thanksgiving weekend," Fiorina said.

Fiorina reiterated that she expects the enterprise systems business, which includes servers and storage, to be profitable some time in the current fiscal year.

Although she did not raise the companywide outlook, Fiorina did up the profitability estimate for the printing and imaging business. At the same time, she said the enterprise-systems business would be somewhat less profitable this year amid pricing pressure and a "tepid" market for corporate information technology spending.

Chief Financial Officer Bob Wayman told analysts that restoring profitability in the enterprise-systems business is taking longer than in HP's other unprofitable businesses, such as PCs.

"There is just more to be done here," Wayman said, pointing to the transition HP is currently undertaking to shift the chips in its high-end servers from Alpha and PA-RISC processors to Intel's Itanium processor. "These transitions are costing us money," he said.

Neff said he was encouraged that HP did not retreat from its goal of making all its businesses profitable this year. "I think what investors are going to want to hear is they didn't back away from overall targets."

Although HP has shown progress in cutting costs following the Compaq merger, analysts say the company will still have to prove that it is better positioned after the merger to compete in the long term against rivals.

"Can HP compete quarter-in and quarter-out versus Dell and IBM? That remains to be seen," said Toni Sacconaghi, an analyst at Wall Street brokerage Sanford Bernstein.

HP also announced an executive shuffle, moving supply-chain boss Mike Winkler to a new role as chief marketing officer, still reporting to Fiorina.

Jeff Clarke, who had been heading up merger integration along with Webb McKinney, will become executive vice president for supply chain and customer operations. McKinney will expand his role to include both merger integration and what HP is dubbing "organizational effectiveness." HP had previously said that Clarke and McKinney would remain in those roles for a year following the completion of the merger with Compaq, which closed in May.

Chief Technology Officer Shane Robison will take on an added responsibility by overseeing HP Labs, which will continue to be run by Dick Lampman.

 

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