HP says no spending recovery yet

Downbeat

ComputerWire: IT Industry Intelligence

Hewlett Packard Co gave a gloomy assessment of the immediate prospects for the IT market yesterday as it unveiled its second quarter results.

The downbeat presentation of the numbers, the last for the standalone HP, was in contrast to the hoopla surrounding the launch of the combined HP/Compaq last week. At the same time, the Palo Alto, California-based company was at pains to point out how the inclusion of some Compaq lines would bolster HP's weaker areas.

Sales for the period ending April 30 were down 9% on the year to $10.6bn.

Operating profits were up 21% to $414m, while net earnings were up 436% to $252m. On a proforma basis, excluding amortization, in process R&D, restructuring and acquisition related costs, net earnings were up 48% to $498m.

The proforma earnings were in line with expectations. However, revenues under shot Wall Street's expectations by $490m. CFO Bob Wayman emphasized that over half of the acquisition charge was related to advertising and fighting a bitter proxy battle with former HP board director Walter Hewlett, who objected to the merger.

Revenues were down in all HP's units. Imaging showed a 4% sequential decrease, which the company put down to normal seasonal patterns. Embedded and personal systems revenue was off 13% sequentially with negative operating margin of 4.9%, although both consumer and commercial notebook revenues were up.

Computing systems showed a 6% decline sequentially, with operating margin of negative 12.7%. IT services revenue slipped 6% sequentially, with the consulting unit showing a 15% slip in revenue. Financing was down 7% sequentially, with negative operating margin of 2.5%.

The company did not give guidance - instead it will give guidance for the combined company next month at its analysts' meeting.

However, it was downbeat on the strength of any IT recovery. In a statement accompanying its results, chairman and CEO Carly Fiorina said, "while a muted recovery in the second half is still possible, we are not counting on any meaningful improvement in IT spending until 2003."

Even then, growth will be a far cry from the heady days of the dot com boom. The company expects 8% to 10% industry growth next year. It expects some of its units to grow faster than this, for example imaging, and NT and Linux servers. Other units will lag behind this rate.

Coming back to this quarter's results, Fiorina said that revenues had been impacted in the month leading up to the closure of its merger with Compaq. She said the high profile lawsuit brought by Walter Hewlett in an effort to invalidate the HP shareholder vote had been a distraction, while the assignment of new roles to 400 top managers meant they had been focused on two things at once. In addition, sales of HP's NT servers had trailed off, as customers guessed, correctly, that this line would be killed off in favor of Compaq's, once the companies merged.

Merger issues apart, Fiorina said "it's also true the level of IT spending continues to be depressed." She said the company was seeing longer selling cycles, with less urgency to buy on the part of customers. She said CIOs did not intend to increase their IT budgets, until they saw signs of economic
recovery.

For the year to date, sales were down 9% to $22bn. Net profits for the first six months, were up 291% to $736m.

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