HP misses earnings targets in difficult Q3

Hewlett-Packard reported growth in earnings and revenue Tuesday for its third fiscal quarter but still missed analyst forecasts, prompting Chairman and Chief Executive Officer Carly Fiorina to acknowledge that the company "should have done better."

The results were tugged down by stiff competition in the PC market, where HP said it had discounted prices too steeply for its own good. Its midrange and low-end Unix server businesses also suffered, as the server market continued to polarize around low-cost "industry standard" servers on the one hand, and higher end Unix systems on the other, officials said.

Revenue for the three months ended July 31 totaled $17.35 billion, up 5 percent from the same quarter last year but lower than the $17.5 billion that analysts had been expecting, according to a poll by Thomson First Call. Earnings on a pro forma basis came in at $0.23 per share, up from $0.14 per share in the third quarter of fiscal 2002. Analysts had been expecting a pro forma profit of $0.26 per share, Thomson said.

The pro forma results include an adjustment of $403 million after taxes, or $0.13 per share, for restructuring and other costs. Excluding the adjustments, earnings according to generally accepted accounting principles came in at $0.10 per share, HP said.

"The third quarter is always tough, but we still should have done better," Fiorina said in a conference call to discuss the results, reading from HP's statement. "Nevertheless, we are confident in our strategy and the actions we're taking. We expect to deliver a strong fourth quarter with every one of our businesses profitable."

Along with the weak sales of its mid- and low-range Unix systems, HP said its enterprise systems group performed poorly overall in Europe and Japan. Sales of its high-end Superdome systems were a bright spot, with revenue up 64 percent over the prior year, HP said.

Fiorina called the move away from midrange Unix servers a "permanent trend." It puts pressure on HP's profitability in the short term, she said, but she argued that HP is positioned well competitively to weather the change because of its strength in high-end Unix servers and low-end systems based on Intel Corp.-type processors.

Overall revenue from HP's enterprise systems group was $3.71 billion, roughly flat from a year earlier, while operating losses came in at $70 million, wider than its loss of $7 million in the immediate prior quarter, but better than the $322 million loss reported for the same quarter a year earlier, the company said.

In its personal systems group, slow desktop sales in the U.S. and HP's "overly aggressive" price discounts pushed the division into the red. But Fiorina said the personal systems group will return to profit by the end of the year, along with its enterprise systems group. Notebook sales in the third quarter were strong, up 27 percent year over year, and that part of the business remained profitable, HP said.

Total revenue from the personal systems group climbed 5 percent to $4.97 billion, while its operating loss was $56 million, smaller than the $140 million loss it reported a year ago.

HP's services division performed well, with revenue from managed services up 21 percent from a year earlier and customer support revenue growing 8 percent. This helped the group return to double-digit profitability during the quarter, HP said. Revenue from the imaging and printing group grew 10 percent year over year to $5.24 billion, and profit returned to "more normal levels," HP said.

The company reduced its headcount in the quarter by about 3,100, more than it had originally planned, with cuts from its enterprise systems, services and consulting businesses. It continued to outsource jobs overseas and now has 8,000 employees in India alone, working in call centers, IT support and other tasks, said Bob Wayman, HP's chief financial officer.

"We're adding more staff in China, Poland, Costa Rica and the Philippines to diversify our offshore efforts," he said.

Looking ahead, analysts had been expecting HP to report earnings per share of $0.36 per share on revenue of $19.04 billion in the fiscal fourth quarter, First Call said. HP's forecast Tuesday was more conservative, predicting revenue of $18.8 billion to $19.1 billion, and earnings per share of $0.34 to $0.36.

Ahead of the announcement, HP's (HPQ) shares on the New York Stock Exchange closed at $22.11, down $0.02 on the day. In after-hours trading its shares fell a little more than 10 percent to $19.80.

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