Analysts, Investors, H-P Look to Fiorina to Deliver

While the new CEO has earned a warm reception on Wall Street, she'll need to meet some high expectations for the praise to continue.
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PALO ALTO, Calif. -- Like a

Texaco

station on a lonesome desert highway, Carly Fiorina may be

Hewlett-Packard's

(HWP)

last chance.

Since joining H-P in July, Fiorina has been

widely hailed as the perfect leader for the networked age: She's accessible, media-savvy and refreshingly direct when fixing problems. She has won the support of H-P execs who feared an outsider at their helm. And she has won warm paeans from the business press.

Fiorina has just as easily won over Wall Street. H-P's stock has risen 17% since she led the company's Nov. 30 meeting with analysts, while the

Nasdaq Composite Index

has gained 8%. "In the past, I think H-P lacked that killer instinct," says Paul Wayne of the Los Angeles-based money-management firm

Kayne Anderson

, which holds H-P stock and bought more this week. "Now after hearing Carly, H-P has it."

But the rain of ticker tape will halt if Fiorina doesn't deliver the strong, steady earnings that shareholders demand. H-P investors have watched the stock

stagger around like a bloodied boxer since 1997. While Fiorina offers hope, she also faces perilously high expectations. Her main task: growing revenue through innovative products and new areas of business like its hyped E-Services group -- all without weighing down profits.

H-P has placed in Fiorina's hands what may be its last solid chance of reclaiming its status as a technology leader. What she does in the next several months will go a long way in deciding whether the PC and printer company will become another

IBM

(IBM) - Get Report

or

Xerox

(XRX) - Get Report

. Both IBM and Xerox were once seen as hoary tech has-beens. IBM has engineered a powerful turnaround by tapping into the Internet economy, while Xerox has watched its own painstaking turnaround efforts crumble on weak revenue in recent months.

After Summer Sag, Will H-P Stock Follow IBM Up, or Xerox Down?

To ease shareholder anxiety, H-P offered reassuring guidance at its analyst meeting last week: The company expects to see both earnings and revenue grow between 12% and 15% in the year ending October 2000. That compares with 7% earnings growth in the year just ended. Fiorina insists she can fulfill her pledge to hit the growth target. "I have no interest in failing to deliver on the first promise I made," she told

TheStreet.com

in an interview last week.

But even Fiorina admits that bringing earnings

consistency to H-P won't be easy. H-P is trying to innovate while growing faster than it has in years. Most mammoth companies can focus on only one strategy at a time. "What H-P needs to do is to put together two or three consecutive quarters of consistent earnings and revenue growth in line with expectations," says Steve Milunovich,

Merrill Lynch's

technology director. Milunovich has an accumulate rating on H-P, and his firm was a recent underwriter for H-P.

Easier said than done. Just how H-P plans to achieve this extra growth is of particular interest to investors, who were led astray earlier this year by Lewis Platt, the current chairman and former CEO. He told the Street that H-P would see double-digit revenue growth in the company's recently completed fiscal year. When H-P released the figures, revenue was up a disappointing 7%.

Boosting revenue has been a tricky problem for H-P, as it was for IBM before its turnaround. The trick is spurring revenue growth without upsetting the company's mammoth balance sheet. Three years ago, H-P tried to boost revenue growth and watched in horror as expenses grew out of control.

Already, H-P's costs and expenses are creeping higher: In its October quarter, the company reported revenue growth of 10% year over year, while costs and expenses grew 12%, thanks in part to a 17% jump in selling, general and administrative expenses. And CFO Robert Wayman says H-P's capital spending budget will rise 50% to $1.8 billion this year. According to Fiorina, the spending will go to R&D and customer closes.

If H-P buys its way to growth, it could follow in

Compaq's

(CPQ)

footsteps. Under CEO Eckhard Pfeiffer, Compaq bought

DEC

and

Tandem

to boost revenue. After he failed to smoothly integrate those companies into Compaq, Pfeiffer was pushed out of his post in

April. "I don't think we would want to grow by making some of the acquisitions Compaq made," says Fiorina.

So H-P's best chance at growth will come from innovation. The company possesses what may be the second-biggest R&D lab on the planet after IBM, yet it hasn't really produced a revolutionary product since the LaserJet printer in 1984. H-P has instead become a seller of other people's platforms: Windows-based PCs and servers, Unix-based servers and storage systems from

EMC

(EMC)

as of this spring and now

Hitachi

(HIT)

.

Instead, H-P has leaned on its two core businesses -- consumer PCs and printers -- both of which are healthy. PC sales, which makes up 30% of H-P's total revenue, grew by 27% year over year in the third quarter, according to

International Data

. "Pavilion PCs are selling like gangbusters," says Duane Zitzner, head of H-P's Computing Systems division. And with IBM and

Packard Bell

out of the PC market, H-P has a chance to boost its share.

The company's printer business is also looking robust, posting 20% year-over-year revenue growth and delivering 60% of the company's profits in its fourth quarter, according to Milunovich. The division accounted for approximately $4.5 billion of the company's $11.3 billion in quarterly revenue. H-P's head of imaging and printing systems, Carolyn Ticknor, says this growth pattern is expected to continue as Internet publishing becomes increasingly prevalent.

H-P realizes it can't afford to just lean on its printer and computing businesses to carry it forward. It's publicly stating its reinvention with a $200 million ad campaign that proclaims its return to its roots -- the innovation that made the company the original -- and most famous -- garage start-up in Silicon Valley.

But if Fiorina is to truly transform H-P, she will have to introduce new technologies that have a material effect on earnings. So far, at least, these initiatives still seem to be parked in the garage. At its meeting with analysts, H-P threw out a lot of cool concepts: eSquirt, eSpeak and CoolTown, a utility computing system that would allow users to connect to the Internet anywhere. But H-P has been unable to wrap these ideas around one concrete, synthesized vision.

H-P has made a major push into E-services, which its Web site broadly defines as "any asset that you make available via the Net to drive new revenue streams or create new efficiencies." Hardly a laser-like focus. E-services is supposed to cover this plan, but it has not yet yielded tangible benefits. Six months after its E-services launch, the business' revenue-sharing deals account for an insignificant "and immaterial" amount of H-P's revenue, says Fiorina. Meanwhile, rival

Sun Microsystems

(SUNW) - Get Report

has taken the lead in the market for business services on the Internet.

Analysts at last week's meeting yawned at many of the new e-initiatives. "Fiorina didn't really break any new ground," concludes Milunovich. And some are concerned that the whole E-services strategy won't have an immediate impact on the company's bottom line. To which Fiorina says, give it time. "The storage business could be hugely successful, but this E-services agreement with

Qwest

(QWST)

doesn't turn into hundreds of millions of dollars in a month or two," she says.

Unless H-P delivers more clearly focused innovation in coming quarters, it may find itself e-jected from more of Wall Street's portfolios. "I guess you have to put an 'e' on something to get this market's attention," says Fred Hickey, a money manager at

High Tech Capital

, which holds put options on H-P. "H-P gives me a sickening feeling right now because its ideas lack substance."

What is clear now is that if anyone has a cure for that queasiness, it's Fiorina.