HP Cuts Boost Profits But Sales Lag

Sales for the Palo Alto, Calif., computer giant for its fiscal second quarter ended April 30, totaled $10.6 billion, down 9 percent from one year ago and down slightly from HP's original "modestly down" guidance provided earlier.

Net earnings for the period, meantime, totaled $252 million, up from $47 million one year ago.

Although it begins life anew with Compaq with significant momentum--the two companies have assigned more than 1,000 managers to their positions, outlined preliminary product roadmaps and consolidated their respective Web sites into a new, HP.com supersite--sluggish sales continue to trouble the company. Though the sluggishness isn't impacting HP companywide--it's printer and imaging business cannot keep up with demand for certain Photosmart and LaserJet devices, for example--it is widespread. None of HP's four, main business units, which include the printer and imaging unit, the embedded and personal systems business unit, the computing systems business unit and the IT services unit, saw overall sequential growth though individual bright spots popped up.

Consumer notebook revenue, for example, hit an all-time high while commercial notebook sales jumped 17 percent over the prior quarter, according to the company. Despite these and other bright spots, the outlook continues to be tough to gauge. For example, though consumer spending in the U.S. continues to hold strong, HP's U.S. sales slumped 16 percent year-over-year. One big reason is continued reluctance on behalf of CEOs and CIOs everywhere to open their wallets.

In a conference call with analysts, HP CFO Bob Wayman summed it this way: "Enterprise IT spending is simply showing no signs of recovery."

"We have made good progress in reducing expenses which are down 12 percent versus the year ago Q2, but revenue is down 20 percent, with NT revenue down almost 30 percent," he added.

One other item of note from the conference call Tuesday: channel inventory of consumer PCs is up, not because HP isn't working to reduce it, but simply because demand has slumped faster than expected. HP ended the quarter with home desktop PC inventories at eight weeks. HP has taken steps to deal with the issue by taking a charge of approximately $37 million for price protection. That's roughly double the level it took for the first quarter. In addition, the company said it would scale back production plans. Commercial PC inventory in the channel, however, appears to be less of a problem. Inventory levels there are around three to four weeks, HP says.

Though CEO Carly Fiorina firmly believes "HP delivered" in the quarter, she could only hope for stronger business spending. "Sluggish corporate IT spending and tough deal pricing once again characterized the enterprise market," she said during the analyst call Tuesday. "The telecom and manufacturing sectors continued to be the weakest. Revenue in our enterprise business declined 5 percent sequentially."

Buoyed by research released today by Gartner that indicates HP gained market share during the first calendar quarter of 2002 in the server market, Fiorina said the company was excited about its "clean sprint out of the gate" with regards to the Compaq acquisition. But, she acknowledged, plenty of hard work remains, not the least of which is convincing corporate customers to start spending their money.