July 26, 2001 10:50 AM PDT

HP to trim 6,000 jobs amid global drop-off

Hewlett-Packard cut 6,000 jobs and lowered its revenue projections Thursday amid a global economic slowdown and weak consumer spending.

The company said that as "economies around the world continue to weaken," its sales couldn't keep pace. It expects sales to fall 14 percent to 16 percent from a year ago, for the quarter ending July 31.

"Think of all geographies as weak. There are no exceptions," said CEO Carly Fiorina, on a conference call with Wall Street analysts. "I don't think we can call when a recovery will occur."

Shares of HP fell $2.09 to $23.59, or 8 percent, in midday trading.

According to First Call, HP is expected to report third-quarter earnings of 19 cents a share on sales of $11.1 billion.

HP said the job reduction--its latest effort to whittle expenses--would save about $500 million annually. The company cut its payroll through layoffs and attrition, delayed pay raises and mandatory vacations. Through the various cost-cutting moves, HP said expenses will be down 2 percent to 4 percent in the third quarter.

Fiorina also said the company would increase its outsourcing efforts, but more for processes such as accounting. Most of HP's manufacturing is already outsourced.

Fiorina said the company's consumer business is "being particularly hard hit," and sales are expected to fall 24 percent. HP, in the middle of a PC price war with Dell Computer, is also facing slower sales of its printers. The back-to-school selling season is likely to be "muted," Fiorina said.

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"The greater source of weakness is consumer spending right now," Fiorina said. "That's true throughout the world."

Merrill Lynch analyst Tom Kraemer said HP's slowing printer sales are a big problem since they account for nearly all of the company's operating income.

"We believe that the weak unit growth in printers will translate into a weak back-to-school period and have a lagged impact on the growth rate of consumables in the future," Kraemer said. "Consumables" are printer supplies, such as ink cartridges, which boost HP's bottom line.

UBS Warburg analyst Don Young said HP had been relying on consumer spending on PCs and printers to keep earnings up. "Consumer PCs and inkjet printers had been HP's main growth drivers for much of their last fiscal year; they are no longer, given the economic climate," Young said in a research note.

Young cut his third-quarter revenue estimate to $10.1 billion from $10.9 billion and his earnings estimate to 4 cents a share from 16 cents a share. He also cut his fourth-quarter and fiscal 2002 estimates.

Around the world
On the bright side, HP's outsourcing and consulting business will show growth of 20 percent and 9 percent, respectively. Printer supplies is also an area of "relative strength," but analysts said that won't last if printer sales remain weaker than expected.

As a result of pricing pressure and weak demand, margins are expected to be about 25 percent to 25.5 percent, Fiorina said.

Like IBM, HP is seeing a "negative currency impact," meaning that the strong dollar abroad is hurting revenue gains. The value of the dollar is particularly a problem in Europe, where a weak euro makes HP products more expensive. In addition, revenue falls because sales in Europe diminish when they are converted from euros to dollars.

Last month, Fiorina noted that economic woes in the United States were spreading to Asia and Latin America. HP was among the first companies to warn of weakness in Europe's economy.

Given weak demand forecasts for PCs and the performance of its peers, HP's revenue warning isn't totally unexpected. Rival Compaq Computer on Wednesday noted turbulent markets overseas and said its U.S. retail business performance was unacceptable. Dell said it would hit its bottom-line estimates but trimmed its sales slightly.

 

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