December 6, 2000 12:10 PM PST

HP's Fiorina details turnaround plans

Hewlett-Packard chief executive Carly Fiorina was contrite about her company's surprisingly bad fourth quarter in a conference with analysts Wednesday, but she promised management changes and improved products will fix many of the company's problems.

Fiorina said she was one of several HP executives who got no bonus for the second half of fiscal 2000 as punishment for the recent poor performance. HP missed analyst expectations by 10 cents a share for the last quarter of fiscal 2000.

"There are no executive bonuses being paid, starting with myself but not ending with myself," Fiorina said. "We are very serious about balancing top-line revenue and bottom-line profit. We failed to meet that objective."

But the company is shifting next year to high-end products such as servers and storage systems, which carry plumper profit margins, and Fiorina said she believes HP stock is a bargain. "Our price-to-earnings ratio is between 16 and 17. The valuation is pretty compelling right now," she said.

Fiorina and chief financial officer Bob Wayman reiterated guidance that the company's revenue growth for fiscal 2001 will be between 15 percent and 17 percent.

"We're comfortable with the same guidance we gave three weeks ago," she said. In addition, HP is comfortable with consensus expectations of first-quarter earnings per share of 44 cents and 2001 earnings per share of $1.98, she said.

Skeptical analysts at the meeting, however, pressed Fiorina for details on how the company would achieve its revnue goals.

"There clearly is skepticism about this revenue guidance," Fiorina responded to analysts. "Despite the very disappointing fourth quarter, we have been right on in terms of revenue guidance for the last five quarters."

Fiorina also said HP is dumping its Verifone software business, the restructuring of which contributed to the company's poor results last quarter.

"We have done some very important work in terms of cutting back the size of that business dramatically. We will make sure we give it appropriate attention as we look for a way to exit from that business going forward," she said.

Verifone had a loss of $48 million for the year, including $29 million in restructuring charges, said Duane Zitzner, head of HP's computer systems division. The company is in the process of eliminating half the division's 3,000 jobs, he said.

Fiorina said the company will continue to focus on its consulting business, which HP expects to become profitable in the first quarter of fiscal 2001.

The company's planned acquisition of PricewaterhouseCoopers failed because the negotiating parties couldn't agree on a price low enough for HP, Fiorina said.

"I was not then and am never willing to overpay for an acquisition," she said. HP would only close the deal if it were neutral to earnings per share in the first year of operation, she said.

Overall, Fiorina predicted HP revenue will grow faster than the overall market in servers, storage, software, notebooks, PCs and information appliances. The company will grow at the same rate as the market in printing and imaging and in services, she said.

Consumer product growth in the United States is decelerating, whereas high-end business product sales are accelerating, she said.

PCs are one consumer area in which sales are even lower than HP expected. The company projects the overall business PC market to post annual growth of just 3 percent and the home PC market 6 percent in fiscal 2001. HP plans revenue growth of 5 percent and 18 percent for two segments.

A grand future for Unix servers
In the booming market for Unix servers, Fiorina offered her most ambitious words yet in the company's struggle to reclaim Unix share from top dog Sun Microsystems.

"2000 was the year we made investments," boosting the product line and changing the sales force structure. "What we're really looking forward to now is the payback on those investments."

HP hopes to boost Unix server sales by 20 percent in fiscal 2001 and predicts the overall market will grow by 10 percent, the company said.

According to the most recent IDC figures, Sun had 33 percent market share and HP 25 percent, she said. "We really see this as a two-horse race. We believe we're pulling away from Compaq and IBM."

In addition, HP will see better business in high-end Unix servers with its Superdome server sales beginning in January. The company has more orders for the 64-processor server than expected.

High-end Unix server revenue dropped in the third and fourth quarters of 2000, Fiorina said. "Our product line had gotten very long in the tooth," she said.

Also on the high end, storage was disappointing. Revenue declined 7 percent from 1999 to 2000, largely because HP severed its relationship to sell EMC hardware and selected Hitachi Data Systems instead. "That cost us hundreds of millions of dollars in top-line revenue," Fiorina said. But orders for a new Hitachi system, which HP sells as its XP512 storage system, are strong for the current quarter.

Rebuilding HP
Fiorina and Wayman gave a detailed view of how HP has restructured itself over the last year.

One key change was in management. Fiorina said the company replaced a quarter of the top 200 executives with new personnel drawn from inside and outside the company.

Another change was reducing the number of HP's financial units. The company now has 17 instead of 83 business units with their own profit-and-loss accounting, she said.

"For years, HP has been a complex and very decentralized company," Wayman said. That decentralization was part of why HP had such a hard time seeing last quarter's problems coming.

In another streamlining effort, HP is standardizing the software it uses to monitor how its businesses are performing, Fiorina said.

The company also is switching to a compensation plan that rewards sales representatives when revenue comes in instead of when orders are placed. One problem with the fourth quarter was that strong orders meant heavy compensation expenses before the balancing income from those orders arrived, said Ann Livermore, president of HP's business customer organization.

In addition, sales representatives' compensation now will be linked not just to revenue but also to profit margin, Livermore said.

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Carly Fiorina, VeriFone Inc., earnings per share, Unix server, HP

 

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