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Filter - Cynthia L. Webb
HP's No Gloating Zone


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By Cynthia L. Webb Staff Writer
Wednesday, May 19, 2004; 9:30 AM

To a tee, Hewlett-Packard followed the script yesterday that any good technology firm should use when announcing strong quarterly earnings -- downplay the good news and stress the many, many challenges still to be faced.

There was certainly plenty for HP to brag about, with the company reporting solid second-quarter sales and a 34-percent hike in profit. But don't get carried away, HP chief Carly Fiorina seemed to be saying to investors when she "acknowledged that corporate clients were still reluctant to spend millions on computer upgrades, and said the economy remained weak," The Associated Press reported. More cautious remarks from Fiorina's conference call with analysts: "Customers are very concerned about value ... and pricing remains extremely competitive. Customers are willing to buy but remain discriminating."
The Associated Press via Hewlett-Packard Profit Jumps 34 Percent (Registration required)

But many analysts and some news organizations just weren't buying HP's efforts to downplay the good news. For example, Caris & Co. analyst Mark Stahlman told the San Francisco Chronicle that "he believes HP is being too cautious in its projections in light of clear signs of a tech recovery. 'I think the numbers at HP speak louder than their own words,' said Stahlman, who does not own HP stock and whose group has no investment banking relationship with the company. 'The results for this quarter and their upgrade for revenue in the second half are consistent with what we have heard from Cisco, Dell, IBM and others. . .. The dance is pretty clear. We're in a substantial demand recovery, which is likely to be sustained through '04 and '05.'"
The San Francisco Chronicle: HP Has Reason To Crow

And the Financial Times picked up on this Fiorina remark: "Corporate IT demand continues to improve," she said. That statement surely helped the FT declare that a "solid revival in technology spending is under way." Yet the newspaper kept everything balanced by noting that Fiorina "added ... that price competition remained intense. HP executives also indicated that the shift towards standards-based technology would continue to eat into the company's profit margins, forcing it to reduce costs further." Fiorina also said much of IT spending "growth is overseas ... while tech budgets in the USA are up just 1% to 2%," according to USA Today's report.
The Financial Times: HP Adds To Feeling of Revival For Techs
USA Today: Fiorina Cautious As HP Releases Record Earnings

The New York Times gave HP's performance a rosy review, reporting that the company's results show "that the technology business continued to improve as [HP] reported solid quarterly results with strong gains in both revenue and profit. The report also underlines the continuing progress the company has made since its controversial acquisition of Compaq Computer two years ago." The Times noted that HP is still winning the printer war against Dell: "The printer business is Hewlett-Packard's profit engine, and it continues to hum. To date, competitors, including Dell, which entered the printer market last year, have not weakened Hewlett-Packard's lucrative printer franchise. Revenue for the imaging and printing group increased 11 percent from the year-earlier quarter, to $6.1 billion."
The New York Times: Hewlett Posts Gain In Profit and Revenue (Registration required)

And more cork-popping from The Wall Street Journal: The PC-maker's "results may help quell questions about HP's inconsistent business execution and middling growth since it swallowed Compaq Computer Corp. in a $19 billion deal in 2002. Sales of HP's printers, personal computers, computer servers and technology services all increased by more than 10%, in one of the Palo Alto, Calif., company's more even performances to date."
The Wall Street Journal: HP Posts 34% Increase In Profit (Subscription required)

The San Jose Mercury News noted that "Dell itself posted solid earnings last week, underscoring that as much as the two tech companies bash each other, both are benefiting from an upturn in corporate and consumer technology spending." The Merc also picked up on this bit of positive news: "HP hired about 1,100 people during the quarter, in addition to adding about 2,500 through several acquisitions."
The San Jose Mercury News: Hewlett-Packard Gains In Upturn (Registration required)

But Wait, Maybe Fiorina Is Right...

In reacting to HP's earnings news, Wall Street continued its trend of discounting stellar numbers. Traders and institutional investors don't just want firework-worthy earnings, they appear to want companies to best competitors by leaps and bounds. For HP, this means the company's track record is constantly being weighed against that pesky rival from Texas -- Dell. "Wall Street veterans sounded notes of caution about HP's earnings report. Most analysts polled by Thomson First Call rated HP stock a 'hold,' and share performance lagged that of HP's fiercest rivals: Dell, one of the world's most efficient retailers, and IBM Corp., the leader in technology consulting services," The Associated Press reported. "Locked in a seemingly endless struggle with Dell, HP apparently cannot match their competitors' flexibility ... and capacity to ride component pricing trends," technology analyst Stahlman wrote in a report this week, according to the AP. "At the same time, Dell's commitment to squeeze HP's bedrock printer franchise is also likely to be a concern."

The Los Angeles Times picked up on a different vulnerability that was revealed in the HP earnings report -- declining profit margins. "HP archrival Dell Inc. has been putting intense pricing pressure on PCs, servers and storage systems, forcing profit margins to be ever thinner. HP's operating profit margin on PCs, for instance, was 0.75% in the just-concluded quarter, down from 1% in the first period. Dell entered the printer business 14 months ago and said last week that it had reached 14% of the all-in-one printer market in the U.S. HP's share is more than 50%, and ... Fiorina told analysts on a conference call that Dell's gain had been offset by a corresponding loss of share by Lexmark International Inc., which makes the printers for Dell. 'The reality is we have record revenue, record profit and we're gaining share' in printers, she said. Nonetheless HP's second-quarter operating profit margin for its printing unit was 15.6%, down from 16.75% a year ago."
The Los Angeles Times: HP's Profit Climbs 34%, But Profit Margins Stir Concern (Registration required)

The New York Times noted that HP's "personal computer division ... reported a slender pretax operating profit of $45 million for the quarter on sales of $6 billion. Hewlett-Packard is a close second in market share behind Dell, but it does not approach Dell's profitability." And The Wall Street Journal quoted Sanford C. Bernstein & Co. analyst Toni Sacconaghi, who "said [HP's] sales growth didn't necessarily translate into improved profitability, particularly in storage and server products. 'H-P continues to face question marks over why it isn't able to drive upside in profitability,' said Mr. Sacconaghi."

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