Gateway, Hewlett-Packard Offer Little Hope for PC Investors

In case you hadn't noticed, technology executives are pretty much making it up at this point.

Boxed Out Gateway, Hewlett-Packard decline

The massive shortfalls confessed Thursday by Hewlett-Packard (HWP) and Gateway (GTW), larger than even the most skeptical observers on Wall Street had been fearing, give the lie to the spurious notion that all the bad news is priced into the PC sector. Yes, the new news is bad. But the worse news is this: The deteriorating economic environment has left management unable to offer investors any meaningful forecasts on where their businesses are heading.

No Visibility

Let's start with H-P. The company said that it now expects to earn 35 cents to 40 cents a share in the first quarter, making the chances fairly good for a year-over-year decline from the 40 cents a share the company earned in 2000. The 17 analysts polled by First Call/Thomson Financial, already cautious on the quarter, were expecting earnings of 42 cents a share.

The news is another kick in groin of H-P's management, which had already lost a good measure of credibility from a number of setbacks over the last six months. CEO Carly Fiorina had indicated that everything was proceeding according to plan when she offered guidance at the company's analyst meeting last month.

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What happened in the last month? On a conference call following H-P's warning, Fiorina summed up the matter with a metaphor technology CEOs seem to be growing increasingly fond of: "December was like somebody turned the lights out."

Ensconced in her darkness, Fiorina refrained from giving guidance for the full year. But it's pretty easy to draw your own conclusion that H-P won't be coming anywhere near meeting its official 15% revenue growth target for 2001. The company's press release forecast sales growth in the "low- to mid-single-digits" in the first quarter of 2001, with no hopes of improvement for the first half of the year. Sales growth of 5% for each of the first two quarters for 2001, a charitable assumption, would give the company around $24.9 billion in sales for that period. To make up the other $31.2 billion required to achieve H-P's 15% full-year target, the company would need to post phenomenal revenue growth of nearly 25% in the third and fourth quarters.

Faint Praise

Revenue growth approaching 25% on a base as large as H-P has is a pipe dream in the current environment. But things are arguably worse at Gateway, whose fourth-quarter results were so rancid that the company felt compelled to send them over the wires a week ahead of schedule. Excluding the writedown of Gateway's tanked Internet investments, the company earned $37.6 million, or 12 cents a share, compared with $126 million, or 38 cents a share, a year ago. Analysts on average were expecting fourth-quarter earnings of 37 cents a share.

Gateway was getting hit hard on the news, trading at $19.75 on Island, about 13.7% below its New York close of $22.90. H-P was faring a bit better, lately sitting at $30.50, down 5.8% from $32.38.

Unlike H-P, and prompted by a holiday shopping season that company executives had described as possibly the worst they'd ever seen, Gateway had already issued a fourth-quarter warning late in November, causing analysts' estimates to come down to the current 37 cents from 62 cents. Moreover, Gateway had cut its 2001 sales forecast to $10.8 billion from $12.2 billion, and lowered its 2001 earnings guidance to $1.89 a share from $2.28 a share, a 17% shortfall.

Turns out that was conservative. Gateway says it now sees sales growing just 3% in 2001. That would put sales at $9.99 billion, more than $800 million shy of its lowered guidance. Earnings, Gateway now expects, will grow 6%, with earnings-per-share coming in at $1.44, a whopping 24% below its lowered estimate.

To think that other PC makers won't follow suit is probably naive. Like so many other tech companies, executives at both H-P and Gateway described a sharp dropoff in demand in nearly every aspect of their businesses -- including, in H-P's case, every part of its Internet infrastructure segment. With demand falling, aggressive discounting will keep competitors' profit margins in the desktop and notebook markets under pressure for the foreseeable future. On Gateway's earnings conference call, CFO John Todd made no bones about his company's strategy of settling down for a full-fledged, long-term price war. "Despite the market, we will continue to pursue market-share gains," said Todd. "In the short run, pricing will affect EPS. But in the long term, we'll significantly improve our chances of having a leading position."

In the meantime, don't look for any other PC makers to light a candle to this darkness.

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