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HP's Disappointing 4th-Quarter Earnings Hit Company's Shares

Wall St.: Profit, revenue rise for Hewlett-Packard, but the failure to meet expectations causes concern about its strategy.


SAN FRANCISCO — Investors pummeled the stock of diversified technology giant Hewlett-Packard Co. on Monday after the company's fourth-quarter earnings fell far short of Wall Street's expectations. HP shares lost $5, or nearly 13%, to close at $34.13--a new 52-week low--in New York Stock Exchange trading.

Excluding one-time gains and losses, the company earned 41 cents per share, compared with earnings of 51 cents expected by analysts polled by First Call/Thomson Financial.

Carly Fiorina, who took over as HP's chief executive last year, expressed disappointment in the performance and accepted "full responsibility for the shortfall," according to a prepared statement.

After adjustments for restructuring expenses, investment gains and losses, and other one-time items, HP reported fourth-quarter net earnings of $922 million, or 45 cents per share, compared with $760 million in profit, or 36 cents per share, in the period a year earlier. The Palo Alto firm's net revenue rose sharply to $13.3 billion, from $11.4 billion a year ago.

Analysts viewed the results as a troubling sign that HP's management may have lost control over the company's far-flung operations.

"I'm astounded that they didn't warn if they were going to miss that badly," said Roger Kay, an analyst with International Data Corp. "[Fiorina's] statements are disquieting because she appeared to be taken by surprise."

Robert Wayman, HP's chief financial officer, told Reuters that a recently introduced reporting system did not alert executives about the earnings shortfall until last weekend. But such eleventh-hour disclosures have also plagued the company in past years.

Separately, Hewlett-Packard announced that it had ceased efforts to acquire the consulting business of the large accounting firm, PricewaterhouseCoopers. Analysts suggested that the roughly $18-billion acquisition, unveiled by Fiorina two months ago, may not have been a good fit for HP, despite her desire for aggressive expansion of its information-services business. And given the company's serious challenges managing current operations, the timing was wrong, they said.

The fourth quarter's shortfall and the failed merger represent two large bumps in the previously smooth road traveled by Fiorina, who became HP's chief executive in July 1999. Since then she has expanded the firm's Internet software and service offerings, reorganized its sales force, and spun off Agilent, HP's former test-and-measurement unit, as a separate company.

Although analysts applauded the company's overall revenue growth of some 17%, they raised concerns that much of the improvement came from "bottom feeding"--that is, consumer PCs and printers that are the least-profitable products in the computer market. HP has grabbed a bigger share of the consumer PC market in the last year, vying with Compaq for the top spot and even eclipsing Dell's gazelle-like growth rate, said Kay. HP's revenue for home PCs jumped 62% in the fourth quarter.

But HP's management failed to rein in expenses incurred while selling higher-cost items, such as server computers and sophisticated printers, where sales growth was relatively sluggish.

"It appears that [HP] over-hired"--almost an oxymoron in Silicon Valley, where most companies are desperate to find qualified professionals, said Mark Specker, an analyst with the investment bank Wit SoundView in San Francisco. "It's mysterious."

Unlike firms that specialize in one area, such as PCs or software, HP builds printers, PCs and servers that manage computer networks, and provides technology services. Such diverse offerings create a particularly complex management headache, which could partly explain the forecasting problems.

"I [place] the blame with the legacy of the company," said Daniel Kunstler of the investment bank JP Morgan in San Francisco. With such a broad set of offerings, "it's a little hard to get your arms around this thing," he said.

For the fiscal year ending Oct. 31, HP reported $48.8 billion in net revenue, compared to $42.4 billion in 1999. Net earnings from operations were $3.6 billion, or $1.73 per share, up from $3.1 billion, or $1.49 per share the year before.

But Fiorina's popularity within HP remains strong, said analyst George Elling of Lehman Bros. in New York. "She created a much greater sense of urgency for the company," he said.

Looking forward, analysts said that HP's fortunes will turn on holding costs down while boosting sales of a new line of high-cost servers dubbed "Superdome," expected to be available in volume starting in January.

In Monday's earnings statement, HP predicted an ambitious revenue growth target of 15%-17% in the next fiscal year, raising some eyebrows among analysts, given projected weaknesses for the technology sector in a cooling economy.

"Carly said she was sorry, but I'm not sure that she's half as sorry as she will be" if the company fails to meet such aggressive targets, said IDC's Kay.

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