Hewlett-Packard Stocks Down on Flat Income

Hewlett-Packard Co. (HPQ) shares slipped Thursday after the technology company reported a minuscule increase in net income as its low-margin printer and paper businesses saw profit margins slip.

The computer maker's interim chief told analysts after Wednesday's after-market earnings report that "there is work to be done" a week after the company's board ousted CEO Carly Fiorina (search).

HP shares fell 16 cents to $20.90 Thursday on the New York Stock Exchange. Its shares have ranged from $16.08 to $24.29 over the past 52 weeks.

For the three months ended Jan. 31, HP reported a profit of $943 million, or 32 cents per share, only 0.7 percent higher than the $936 million, or 30 cents per share, it earned in the first fiscal quarter of 2004.

Excluding special items, including at least $115 million to settle patent litigation with Intergraph Corp., HP would have earned 37 cents per share, compared with 35 cents per share in the same period a year earlier.

Quarterly revenue was a record $21.5 billion, up 10 percent from $19.5 billion in the same quarter a year ago. But when adjusted for currency fluctuations around the world, revenue increased only 5 percent from a year ago, interim CEO Robert Wayman said Wednesday.

HP's quarterly performance beat expectations of analysts polled by Thomson First Call, who forecast Palo Alto, Calif.-based HP would earn 34 cents per share on sales of nearly $21 billion.

The tepid results show HP is losing ground to competitors and lacked a viable business strategy for the next chief executive to execute, analysts said.

The report came one week after company directors dismissed Fiorina for failing to slash costs and boost sales quickly enough. HP is searching for her replacement, and board members have suggested they'll focus on external candidates.

Rivals seized on Fiorina's departure and the lackluster earnings report, portraying HP as unstable and bereft of a business strategy that any chief executive could execute successfully.

"HP can't correct the systemic problems in its enterprise computing business simply by changing CEOs," Larry Singer, senior vice president for business strategy at Sun Microsystems Inc. (SUNW), wrote analysts and reporters Wednesday in an e-mail. "There is no magic wand HP can wave to erase years of neglect and failure to invest in its (information technology) business."

Sun competes against HP in the computer server market, where HP's first-quarter operating profits dropped to $71 million, down from $153 million in the same 2004 period. Santa Clara, Calif.-based Sun estimates that it has wooed at least 185 former HP customers through a cutthroat campaign dubbed, "HP Away."

Wayman, who is also HP's chief financial officer, would not discuss details of Fiorina's succession — only quarterly results, which he called "solid." He was particularly pleased with a record $3.8 billion in revenue from consulting contracts, an increase of 20 percent from the same quarter a year ago.

But he acknowledged that the company was under pressure to perform better. He said revenue for the upcoming quarter, which ends in April, would be at least $21.2 billion, similar to Wall Street's expectations.

He also said the company would continue to slash expenses — possibly escalating a cost-cutting campaign that earned Fiorina the moniker "Chainsaw Carly" throughout Silicon Valley.

HP reduced research and development costs to $878 million in the first quarter from $889 million in the same quarter of 2004 — a risky move for any company in the fiercely competitive technology sector. "General and administrative" costs — which include expenses such as legal fees and consultants — swelled to $2.7 billion, up from $2.58 billion in the same period last year.

Wayman wouldn't say how many people would be laid off this year at HP, which ended 2004 with roughly 150,000 employees. But the company spent roughly $60 million in the fiscal first quarter on work force reduction plans, and it plans to spend as much as $140 million more in the current quarter.

Most analysts polled by Thomson First Call continued to rate HP stock a "hold," and share performance lags that of HP's fiercest rivals: Dell Inc., one of the world's most efficient retailers, and IBM Corp., the leader in technology consulting services — a lucrative niche HP is trying to penetrate.

Analysts said they would remain skeptical about HP's prospects, regardless of the next CEO. The company is in a similar position to beleaguered retailer Kmart Holding Corp. (KMRT), whose profits are squeezed between high-end discounter Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT), a model of retail efficiency.

Given the sharply declining profit margins of printers and other low-end hardware, some experts have been suggesting shareholders might be better off if HP were split into two or more pieces. Experts say the board should consider new strategies so the company doesn't face such unrelenting competition on multiple fronts.

"The strategy that HP was running with Carly was trying to drive margins up in every business group, and that strategy has clearly failed," said Martin Reynolds, vice president of technology research firm Gartner Inc. "The board needs to move on and come up with something other than a horizontal strategy."