H-P's Report Won't Raise Hopes - TheStreet

Updated from 5:18 p.m. EDT

Wall Street was prepared to get less than it wanted out of


(HPQ) - Get Report

. It didn't know it would be revenue -- rather than information -- that would be missing.

Coming just a week after the technology giant finalized its merger with Compaq, H-P wasn't expected to give much detail on the combined entity's June quarter outlook. The company plans to deliver full-blown guidance at its June 4 analyst meeting.

Instead, it detailed a 7% sequential decline in revenue for H-P alone, from its fiscal first quarter to second quarter, falling from $11.4 billion to $10.6 billion. Those revenue figures didn't stack up to the second quarter of 2001's $11.6 billion in revenue or H-P's earlier projections of a modest revenue decline in the second quarter of 2002.

Pro forma earnings per share suffered a more dramatic 14% drop from 29 cents a share in the first quarter to 25 cents a share in the second quarter, in line with expectations. Including charges related to the Compaq acquisition, restructuring, goodwill, in-process R&D and investment losses, the company posted a much slimmer net profit of 12 cents a share, according to generally accepted accounting principles. In the first quarter, H-P put together 25 cents a share in GAAP earnings.

"The IT spending environment remains tough around the world," said CEO Carly Fiorina in a statement. U.S. revenue declined 11% sequentially, leading all other geographies. Fiorina went beyond the words of her tech CEO peers, however, when she delivered a 2002 outlook devoid of optimism: "While a muted recovery in the second half is still possible, we are not counting on meaningful improvement in IT spending until 2003."

'Muted' Means...

Fiorina elaborated on a postmarket conference call with investors that "muted" suggests 2% industry growth, while even 2003's potential improvement is not heady double-digit material. "Our current view of 2003 is that the IT spending environment overall will be 8% to 10% up. Certainly not 10% plus. That's not a change from where we've been in the last six months." That relates to industry growth across H-P's businesses, and those levels represent a decline from the late 1990s and 2000.

As a cautionary note, H-P management also added that it saw a slowdown in consumer spending beginning in March and worsening in April. It would not extrapolate on that phenomenon, but CFO Bob Wayman outlined its effects in causing a buildup in inventory to a high eight weeks of product in the channel. Wayman described an environment where H-P's total number of units in the channel shrunk, but end demand deteriorated steeply to cause the overflow. In the second quarter, H-P spent $37 million in the channel to maintain its PC prices among resellers. It seems that while consumer spending has held up more heroically than corporate spending recently, a slight consumer chill affected the end of H-P's quarter.

On that note, the personal systems group revenue, including consumer and commercial PCs, laptops and other devices, dropped 14% sequentially. The group managed to keep more momentum than expected after the holiday season in the first quarter, making for a tough quarter-on-quarter comparison. Bucking the trend, commercial and consumer laptops continued to sell like gangbusters, with revenue up 17% and 10% sequentially, respectively. Consumer PC sales, however, declined 30% in the quarter. Margins in the group were pinched because of rising component prices such as a $35 per unit increase in memory that Wayman said H-P was unable to pass along to customers.

Meanwhile, H-P's server and higher-power computing devices saw their sales slide 6% sequentially, as did the all-important revenue in the IT services segment. H-P blamed both on a listless corporate spending climate. Fiorina pointed out a 30% revenue drop in corporate servers running Windows NT, one of the items she attributed to merger fallout, given that Compaq's servers are expected to rule the roost after the merger, with H-P's low-end servers bowing out. Also, Fiorina highlighted "fierce" pricing pressure in the storage segment.

Printing Delivers

Once again, the printing business saved the day as it saw the percentage of high-margin printer-supply products such as toner nudging over 50% of segment revenues for the first time to 53%. Sales fell 4% sequentially in a seasonal decline. Wayman described a scenario in which H-P was struggling to meet the demand for Inkjet, LaserJet and all-in-one printers, which helped lead to a $500 million decline in company inventory and has printer, toner and ink supplies well below where H-P would like them to be.

The printing group helped H-P improve its gross margins from 26.9% to 28.7%, besting its pledge to hold the number steady after first-quarter gains.

For the curious among investors, Wayman broke out the much-hyped expense of advertising in the proxy battle which pitted the company against former board member, major shareholder and founder's son, Walter Hewlett. Wayman said that the company took $140 million in charges during the quarter related to the Compaq acquisition, $75 million of which could be attributed to advertising and proxy solicitation. The number had been estimated by critics to be twice as high.

H-P gained 3% in Tuesday's tech rally, but gave back 3% in aftermarket trading on its light revenue. Wayman summed up H-P's performance given the headline-grabbing lawsuit filed by Hewlett and massive managerial transition that blurred the last month of the quarter as "not a bad result, given all that was thrown at us this quarter."