Readers Talk Back

FASB's Proposal Solves Little

Re: Options Expensing Ripe for Abuse

To the Editor:

Troy Wolverton's article quotes heavily from accountants pointing accusatory fingers at the "spotty track record" of corporate America, especially high tech.

My biggest problem with the entire Financial Accounting Standards Board options expensing issue is that it is like putting the foxes in charge of the chicken farm. The Enron and Tyco fiascos were not perpetrated by CEOs alone, but with the active participation of their accountant CFOs and their negligent/complicit (Arthur Anderson) auditors.

Now, for the core issue of expensing options, from my perspective as a stock investor: I prefer the present system of footnoting. Yes, companies today are all over the map with regards to how they estimate their options in their footnotes. But this point only highlights why the FASB's proposal is moronic accounting poppycock! By forcing estimates into earnings calculations, the new, proposed rule will only obfuscate the earnings numbers at which this simple-headed investor looks.

The article focuses exclusively upon how tech companies under-report options expenses today. Of course, this popular scenario is always used to justify the need for expensing of options to "properly" adjust earnings. However, what is painfully neglected is the reverse case (of the past few years), when a tumbling stock market renders billions of dollars of options to expire worthless. Under the FASB proposal, these previously cost-expensed options must now be added back to earnings. So, even though a company's real earnings may be getting worse, a tumbling stock price will allow a company to report less-bad earnings that are artificially inflated by the FASB-mandated "stock options expensing." As a simple stock investor, I can't even imagine trying to de-convolute these "earnings" reports to discover the real health of a company.

Lastly, although the article didn't even address my discussed concerns, the title jumped out at me that "options expensing is ripe for abuse" (by accountants)! Now for some positive feedback, perhaps the FASB should try to enforce uniform guidelines on how to properly expense options in footnotes, before they thrust their mandates on completely rewriting earnings reports (and rendering them useless to common investors such as myself).

Sincerely,

James Chen, Palo Alto, Calif., (Received June 29, 2004)

The Carly Fiorina Attack Is Not Fact-Based

Re: The Nation's Worst CEOs

To the Editor:

Jon Markman's recent column excoriating Hewlett-Packard's Carly Fiorina as one of America's worst CEOs brings to mind the old wisdom that, "It ain't so much the things we don't know that get us in trouble. It's the things that we know that ain't so."

Mr. Markman bases his case around six facts he uses to make his argument. Each is pithy. Each is quotable. Each is completely untrue.

Let's take them in turn.

First, Mr. Markman contends that Hewlett-Packard's merger with Compaq has "utterly failed to deliver on its promise." Not true. The promise of the merger was to put H-P back in a leadership position at the very center of the industry.

Today, H-P is now No. 1 or No. 2 in virtually every market, customer segment and region in which we compete, and proving Jack Welch's old axiom that only businesses that are No. 1 or No. 2 create sustainable revenue and profit growth.

We delivered $3.5 billion in merger-related cost savings, $1 billion more than planned, one year ahead of schedule. And we have now returned to strong top-line performance, growing 9% and 12% year-over-year respectively in Q1 and Q2 of FY04.

Indeed, we are on course today to close FY04 with $7 billion in organic growth ... in other words, our organic growth this year will create a company larger in revenue than EMC.

Second, Mr. Markman contends that H-P is not profitable in personal computers. Not true. In FY03 (our last fiscal year), we were one of the only two major PC vendors to make a profit in PCs, and we did this while checking Dell's share gains and swapping the No. 1 share position back and forth. In the last three quarters, we have outgrown Dell in PCs and notebooks, while posting a 19% year-over-year revenue growth, while doubling our profits. Compare that to IBM's PC business, which went from a profit of $47 million to a loss of $118 million in the same period.

Third, Mr. Markman contends that HP is not profitable in mainframe computers. Not true. Actually, we don't have mainframes. But our high-end servers are profitable, and have been for three quarters in a row, and in many cases, lead the market.

Fourth, Mr. Markman contends that HP is not profitable in services. Not true. Our services business is turning a profit, recently landed what one magazine called "the richest prize in technology" -- Proctor & Gamble's huge $3 billion IT contract -- and just this month, was named in a study of 12,000 IT managers and professionals as No. 1 in customer satisfaction.

Fifth, Mr. Markman contends that our printer business is being "hollowed out" by Dell. Not true - in fact, slightly delusional. H-P ships more printers in one month -- more than one million -- than Dell ships in one year, and that number is increasing. In fact, in 2004, consumers are buying H-P printers at a rate of more than one per second. Studies show that Dell's gains are actually coming at the expense of other competitors -- primarily Lexmark -- and not H-P. In fact, our Imaging and Printing business is going from strength to strength, as evidenced by our ability to further improve the profitability of the business. For example, in FY01, H-P's last year as a standalone company, the Imaging and Printing business had operating margins of 10.1%. In FY03, our last fiscal year, operating profits in the business increased to 16.4% of revenue ... far in excess of our competitors.

Sixth, Mr. Markman then contends that despite being "hollowed out," H-P's printer business still brings in the majority of the entire entity's earnings. We are proud of the printing franchise we have built and the best-in-class financials this business drives. However, despite the fact that the business is more profitable than ever before, H-P is less dependent on the profits from Imaging and Printing, as the rest of our businesses returned to profitability and have begun contributing to earnings. In fact, each of our major lines of business has now been profitable for three quarters in a row -- validating the success of the merger.

In FY01, again, H-P's last year as a standalone company, the Imaging and Printing business accounted for 138% of segment operating profit. In FY02, this number was 107% and in FY03, this number was 79%. So, while the Imaging and Printing business is clearly the profit driver of the company, the progress we have made in the other businesses has made us less dependent on Imaging and Printing operating profit.

By contrast, Mr. Markman correctly points out that many other analysts are giving Carly Fiorina credit for improving results and turning H-P around. We think there is good reason for that: five years ago, when Carly took over as CEO, H-P had grown bloated and unfocused, growing in the low-single digits in the middle of the biggest technology boom in history, while missing nine quarters in a row. She began a reinvention -- consolidating 87 separate product divisions down to four, optimizing 26 supply chains down to five -- culminating in the Compaq merger (which, again, ultimately produced more than $3.5 billion in savings, $1 billion more than predicted, a year ahead of plan.

Today, what most people see is a Fortune 11 company with an $80 million annual run rate; with an accelerating rate of patent innovation (11 new patents a day, fifth in the world); with $15 billion in cash on hand; leading nearly every market in which it competes; growing profits in every business with better balance across our portfolio; generating revenues 9% YOY in Q104 and 12% YOY in Q204, beating Street expectations by $800 million; and leveraging the depth of its portfolio to lead the creation of new categories such as digital photography and digital entertainment, through new relationships with media and entertainment companies including Disney, DreamWorks, Time Warner, Avid, Universal Music Group, Starbucks, and Apple. That is one of the reasons why Gartner, Forrester and Meta post-merger are now recognizing H-P as a market- and thought-leader in several key growth categories including utility computing, management, blades, managed services and our overall adaptive enterprise strategy.

Frankly, we were surprised that Mr. Markman's list of worst CEOs didn't include the leadership of companies like Enron and Tyco, who took millions from their companies while leaving so many investors and shareowners penniless. His disagreements with Ms. Fiorina, while not based on fact, seem more to do with disagreements over strategy and direction -- strategic choices, might I add, that have been informed by a deep understanding of customer requirements, market dynamics, the competitive landscape, H-P capabilities, shareowner interests and employee ambitions.

But remember, we are a company that believes that everything is possible. If he is willing, we cordially extend an invitation to Mr. Markman to come out to Palo Alto and see what so many others have seen -- that H-P is a company built for the future and poised for growth. To suggest anything different just ain't so.

Sincerely,

Allison Johnson, SVP, Corporate Marketing, Hewlett-Packard, (Received June 28, 2004)

Avoiding 'Mangled Packages'

Re: Net Phone Threat May Ring Hollow for Bells

Dear Mr. Moritz:

I am a VoIP professional.

To avoid the "mangled packets" your article discusses, cable companies will have to invest in the infrastructure (Cisco or Juniper) that creates the equivalent of "high-occupancy vehicle" lanes in their plants. The only alternative is reducing the end-to-end delay substantially.

Vonage, Net-to-phone, et al, have no way to do that as long as they must use RBOC gateways to reach non-VoIP users and rely on servers to associate calling endpoints with each other. The RBOCs are best-positioned for VoIP, as they install fiber to the home. They will make a profit, not the cable companies.

Skype (from the makers of Kazaa) is a long-term "fly in the ointment." I use it with others who have downloaded the free software. It behaves much like Instant Messenger for voice, and the quality is extraordinary. Technically, it reduces the delay by peer-to-peer networking (no servers to divert the path and add delay). Skype is developing a community that will use its service similar to the community developed by music sharers. However, once they have to use gateways to call non-Skype users, they're back into the server mode. It's hard to imagine how it will make money charging for the gateway use, because it compromises its peer-to-peer advantage and can't be much better than Vonage.

Sincerely,

Chet Seligman; Point Reyes Station, Calif., (Received June 25, 2004)

The Market Tunes Out Radio Commercials

Re: Wall Street Sounds Off on Radio Daze

Dear Mr. Mannes:

Those Wall Street analysts you quoted forgot one thing: Satellite radio. Just last year those guys were saying that no one would pay for something they can get for free. Now XM and Sirius have 2.5 million subscribers between them.

What's one of the main points in their advertising? No commercials! Two-and-a-half million listeners are willing to pay to get away from annoying commercials, while getting better radio. This, coupled with overall declining levels of listeners for broadcasters, means advertisers are wasting their money on broadcast radio. No one listens anymore. Clear Channel et al supply nothing more than background noise. The real listeners are moving to satellite. Investors in broadcast radio can look forward to long, slow fade.

Investors and analysts have a very good example of what's going to happen with broadcast/satellite radio in cable/broadcast TV. I expect radio to follow the same path, though it may not take as long for satellite to overtake broadcast as it took cable to overtake broadcast TV, since consumers are now used to paying for programming as opposed to cable in the 1970s, when you had to be an "idiot" to pay for TV.

Sincerely,

Philip Gribosky, Norwalk, Conn., (Received June 21, 2004)

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