Hewlett-Packard Meets Lowered Estimates

Hewlett-Packard (HWP Quote) reported higher earnings Wednesday that exceeded Wall Street's lowered expectations, but its revenue growth of 10% barely met the company's estimates.

The computer manufacturer also said it had priced its initial public offering of Agilent Technologies, which it is spinning off, at $30 a share; they had been expected to be prices at $26-$28. Agilent will begin trading Thursday.

For the fourth fiscal quarter ended Oct. 31, H-P, which is based in Palo Alto, Calif., reported net income of $760 million, or 73 cents a diluted share, up from $710 million, or 68 cents a share, a year earlier.

The results included expenses related to the spinoff of Agilent. Excluding them, H-P posted net income from continuing operations of 75 cents a share. The consensus estimate of analysts polled by First Call/Thomson Financial was 73 cents.

Revenue rose to $11.36 billion from $10.29 billion a year ago. These numbers are reported for continuing operations, without Agilent.

"We executed solidly despite this quarter's challenges," Carly Fiorina, H-P's new president and chief executive, said in a statement. "We have an aggressive agenda for change, and we're making good progress on it." This was the company's first full quarter under Fiorina.

Investors welcomed the financial results, which were released after the closing bell of regular trading. Shares of Hewlett-Packard rose 4 7/8 in after-hours trading. They had ended regular trading at 4 p.m. EST at 77 7/16, up 1 5/16. Still, the shares are down more than 30% from their mid-July high of 116 1/4, mostly because of concerns about the company's sales growth.

Fiorina projected optimistic top- and bottom-line growth in the range of 12%-15% for fiscal year 2000. She set a goal of 12%-15% in year-over-year revenue growth for fiscal year 2000, with the second half stronger than the first half.

That could be difficult to attain. After all, former chief executive Lew Platt promised Wall Street low- to mid-double-digit revenue growth for the second half of the company's recently completed fiscal year and it turns out second-half fiscal-year revenue growth year over year will only be around 10%.

The operating expenses displayed some surprising numbers. Research and development costs were up only 1.3%, to $612 million from $604 million. Meanwhile selling, general and administrative costs were up 17.4%, to $1.74 billion from $1.48 billion. Before listening to the earnings conference call, analyst William Milton of Brown Brothers was surprised that R&D earnings were down from the quarter before. He said, "It appears that R&D was cut at the end of the quarter to make earnings." He rates the company a neutral and his firm does not participate in underwriting.

This report comes on the heels of Fiorina's warning at the beginning of October that revenue growth for the quarter would be about 10%, the low end of earlier forecasts. She blamed the downward revision on disruption in the personal computer supply chain caused by the earthquake in Taiwan in September. Many analysts subsequently lowered their expectations to the 7%-10% range.

The imaging and printing systems continue to do exceptionally well. But despite meeting the pessimistic expectations, revenue numbers continue to be disappointing, largely because of market share losses in several key areas, primarily Unix servers (to Sun Microsystems (SUNW Quote)) and commercial PCs (to Dell (DELL Quote)).

However, there was also the bitter dissolution of H-P's longstanding storage system partnership with EMC (EMC Quote) back in June, which resulted in a battle for customers, with H-P steeply discounting prices and even giving the product away. The computer services market, a small business which accounts for only 15%-16% of the company's revenue mix, has also resorted to giving hardware away to obtain service contracts.

Fiorina, who joined the company in July from Lucent (LU Quote), also faces the challenge of trying to change H-P's corporate culture. "She needs to instill a culture of urgency, stimulate more innovation and strike a balance between centralization and decentralization," Milton said. "The company needs to become more of a street fighter." For example, before Fiorina's appointment, the sales force could negotiate its quotas, but there is none of that anymore.

There are also substantial costs, totaling over $200 million, related to the spinoff of Agilent, H-P's medical equipment and electronic measurement operations. The spinoff requires that "two entirely separate corporate infrastructures have to be built. That's spread over a lower revenue base, resulting in diseconomies of scale," Milton noted.

The Agilent IPO consists of 65 million shares on offer, representing a 15% stake in the company. At $30 a share, the offering is expected to raise $1.95 billion.

Agilent also reported strong numbers for the quarter; this bodes well for H-P, which holds an 85% stake in the company. For the quarter ended Oct. 31, Agilent reported net earnings of $146 million compared to a net loss of $51 million a year earlier. Revenue rose to $2.4 billion, 23% more than a year ago.

More guidance on strategy is expected at H-P's meeting for analysts in Santa Clara, Calif., on Nov. 30.

Eric Moskowitz contributed to this report.