Update: PCs help HP to a profit despite soft US revenue

Income still slightly below forecasts

SAN FRANCISCO -- Hewlett-Packard reported a healthy profit Tuesday for its first fiscal quarter of 2003, helped by a return into the black for its PC business. Revenue fell slightly below forecasts, however, due to weak spending among businesses in the U.S. and Latin America, the company said.

HP's net earnings for the quarter came in at $877 million, or $0.29 per share, excluding certain charges and other adjustments, on revenue of $17.9 billion, the company said. Analysts had been expecting earnings per share of $0.28 on revenue of $18.5 billion, according to First Call/Thomson Financial.

Including the adjustments, HP reported net earnings of $721 million for the quarter ending Jan. 31, or $0.24 per share, the company said.

HP's personal systems group reported an operating profit of $33 million for the quarter, compared to a loss of $68 million in the previous quarter, the company said. Sales of consumer PCs and handheld computers increased "significantly," though notebook, business PC and workstation sales declined, HP said.

The enterprise systems group managed to narrow its operating loss for the quarter to $83 million thanks to improved cost management, from a loss of $129 million in the previous quarter. However, revenue for the group dropped 6 percent sequentially to $3.7 billion, HP said. The group is on track to become profitable in the second half of fiscal 2003, CarlyFiorina, HP's chairman and chief executive officer, said during a conference call to discuss the results.

The company's printing and imaging business, which generates the bulk of its profit, benefitted from strong holiday sales but was hurt by weak spending by enterprises. Revenue totalled $5.6 billion, flat compared with the immediate prior quarter, while operating profits of $907 million were down sequentially by 4 percent, HP said.

Services revenue came in at $3 billion, down 3 percent sequentially, and operating profit in that group fell 6 percent, to $341 million. HP said its services business maintained double-digit profit margins.

"HP is making good headway and continues to execute well," Fiorina said in a statement. "Our revenue shortfalls were largely confined to the U.S. market as weak commercial spending continued."

Overall the company reported its best profits since the completion last year of its merger with Compaq Computer, according to Fiorina.

During the quarter, HP saved $734 million as a result of changes in the wake of the merger, 14 percent more than the company had expected to save, Fiorina said. Savings following the merger have come from workforce reductions, procurement savings, reduced logistics costs and facilities closures, she said.

Predicting how IT spending will fare for the remainder of the year is tough, Fiorina said, with market survey projections varying widely from a decline in spending of 5 percent to an increase of 6 percent.

"We would characterize the US market as not improving and not deteriorating. ... It's continuing in the same pattern we've seen for some time," she said.

Revenue from the Americas declined 7 percent overall from the fourth quarter of fiscal 2002, to $8.2 billion, the company said. Revenue from Europe grew 6 percent over the same period to $7.1 billion, accounting for 40 percent of total revenue. The Asia-Pacific region saw revenue increase 3 percent to $1.9 billion, while Japan dropped 6 percent from the prior quarter, to $744 million, HP said.

The company confirmed analysts' expectations for earnings of $0.27 per share for the current quarter. Revenue is likely to be "flat to down slightly," with "mild improvements in gross margins," said Bob Wayman, HP's chief financial officer.

HP shares (HPQ) closed at $18.18 at the end of regular trading on the New York Stock Exchange, up 2.4 percent on the day. In after-hours trading the stock had slipped to $17.40 at the time of this report, according to the Island network.

Copyright © 2003 IDG Communications, Inc.