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HP Shakes Up Unit as Profit Misses Target

After the tech firm issues downbeat news and its stock slides 13%, rival Dell reports that its earnings climbed 29%.

August 13, 2004|Terril Yue Jones | Times Staff Writer

Hewlett-Packard Co. surprised Wall Street on Thursday by revealing that profit in its fiscal third quarter fell far short of expectations.

The computer maker ousted a trio of top managers in charge of the businesses with disappointing results. HP also cut its outlook for the current quarter, prompting the stock to sink as much as 18% before ending the day at $16.96, down $2.57, or 13%, on the New York Stock Exchange.

Chief Executive Carly Fiorina said the problem stemmed from "unacceptable execution" in its enterprise division, which sells complex computing and data-storage systems to corporations, universities and government clients.

HP has been struggling to lift the division into solid profitability but faces fierce competition from archrival Dell Inc. on the low end and IBM Corp. at the high end.

In its own earnings report after the markets closed, Dell said its second-quarter profit rose 29%, in part because of steadily increasing demand for its server computer and storage products.

Dell, which has already overtaken HP as the top seller of personal computers, saw its stock rise to $34 in extended trading Thursday after slipping 45 cents to $33.12 on Nasdaq.

"A quarter doesn't make a trend, but clearly [HP] has an uphill battle continuously competing on price with Dell," said Nick Nilarp, an analyst with Fitch Ratings in New York. "Dell has consistently been able to gain profitable market share."

Fiorina said HP's performance in its printing, PC and services groups was satisfactory, but that "these solid results were overshadowed by unacceptable execution" in the enterprise group.

"We therefore are making immediate management changes," she said. "We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter."

Palo Alto-based HP earned $586 million, or 19 cents a share, in the three months ended July 31, nearly double the $297 million, or 10 cents, it made in last year's third quarter.

Revenue rose 8.9% to $18.9 billion from $17.3 billion a year ago, but operating profit of 24 cents a share was well short of the 31 cents expected by analysts surveyed by Thomson First Call.

HP also said its operating profit in the current quarter would be 35 cents to 39 cents a share on sales of $21 billion to $21.5 billion. Analysts had been expecting operating profit of 43 cents on $21.3 billion in revenue.

HP decided to put out the results one week ahead of schedule. The company didn't give a reason for the early release.

"These negative surprises have become all too common, and one might question if there are more management changes ahead for HP," John Jones, a hardware analyst with Schwab SoundView Capital Markets, wrote in a report to investors.

In an e-mail to employees, Fiorina said Peter Blackmore, head of the group that sells enterprise products and one of HP's top five executives, was leaving the company. He will be replaced by Mike Winkler, who will also remain chief marketing officer.

Jim Milton and Kasper Rorsted, both senior vice presidents in Blackmore's group, are also leaving, Fiorina said.

"It appears they're behind the eight ball, which is tough when you're up against Dell, which is hitting on all cylinders every quarter," said Bill Schaub, vice president of market research firm Techtel in Emeryville, Calif.

Dell said its second-quarter profit was $799 million, or 31 cents a share, up 29% from $621 million, or 24 cents, a year earlier. Sales at the Round Rock, Texas-based company grew 20% to $11.7 billion from $9.8 billion.

Profit in the current quarter is likely to grow 27% to 33 cents a share, Chief Executive Kevin Rollins said in a conference call with analysts.

"Dell is able to react quickly and get configurations that customers want -- just really able to meet the customer's needs better than the next guy," said Rod Bare, a Chicago-based analyst with the investment research firm Morningstar. Competitors like HP are "left with selling less, both on the server side and the consumer side," he said.

Fiorina pointed to slowing demand at the end of the quarter. But IBM on Thursday countered that demand was robust and that it had a bullish outlook for the rest of the year.

"We see the problem is in HP's execution, not in market fundamentals," said an IBM spokeswoman.

Armonk, N.Y.-based IBM also said Thursday it would accelerate its hiring this year to add 18,800 jobs, a third of them in North America. That's 88% more than Big Blue had originally forecast for 2004.

* (BEGIN TEXT OF INFOBOX)

HPÕs tough times

Hewlett-Packard shares, weekly closes and latest

Jan. 16: $25.52 Thursday: $16.95 (down $2.57)

Source: Bloomberg News

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