Hewlett-Packard 1998 financial totals show a company whose revenue grew while profits slipped. But HP 3000 business broke quota more than once over the year and earned 15 percent new business.

Fiscal fourth-quarter HP earnings topped Wall Street estimates, but yearly numbers showed the company earned $200 million less in profit while increasing sales about $5 billion for the year. One day after the $2.9 billion in ’98 earnings were reported, HP predicted its revenues would fall short of estimates for the first quarter of 1999. Investors sold down the stock more than $5 a share on the news.

Information from the HP 3000 segment of the business was brighter the day after corporate results surfaced. Harry Sterling, general manager of the Commercial Systems Division (CSY), reported his group had exceeded quota by more than 50 percent — 73 percent in the Americas alone — while winning significant new business.

“We had an outstanding year,” Sterling said, “with the highest growth in our business in the last five years. We had growth in Europe, which is pretty outstanding, because they’ve been declining over the last three to four years.”

Sterling added the European 3000 sales had small declines each year before 1998. In reversing the trend, CSY Europe “grew over the year before, both in terms of revenues and shipments. That was a very positive sign for us in the European market, which has been very Unix-centric for about the last four to five years.”

“The trends that we’ve seen in the US over the last two years are now also occurring in Europe, in terms of re-thinking their IT strategies. We ended the year at 155 percent of quota.” Sterling explained that quota is the number the HP sales force and distributors take as the yearly objective. Profitability is projected based on simply meeting quota, not exceeding it. Extra sales mean extra profits for CSY and HP.

“Our expenses in the divisions are allocated based on the quota number,” Sterling explained. “When you think our expenses had been planned for 100 percent and we came in 50 percent above that, we had a pretty nice profit — and also a very good reinvestment plan as a result of that success. We’ve had that success for the past two years, which is why we’ve had a very aggressive reinvestment plan for the HP 3000.”

Marketing manager Roy Breslawski’s goal of 30 percent new business for HP 3000s wasn’t met in the year, but Sterling said that 15 percent of the HP 3000 1998 business was from new customers. Breslawski said that internal targets for the number of new customers were exceeded.

“We did have a very strong focus during the past year on acquiring new customers,” Breslawski said. “We not only exceeded very early in the year the stretch goals we set in the beginning of the year, but midway through the year we set new stretch goals — and we beat those before we got through the fourth quarter. In the absolute number of new customers we had to acquire, we passed that up with a full quarter to go.”

While business was growing beyond expectations in the 3000 division, other divisions of HP slowed in the fourth quarter. HP treasurer Larry Tomlinson said that “dollar order growth in Unix servers declined over this time last year, when we experienced growth in the mid-20s.” HP is working to dispel rumors of lagging profitability in that business by noting that its Unix systems business posted excellent profitability in the quarter. “We continue to work through a period where top-line growth is hard to come by in a number of our businesses,” Tomlinson said.

The dip in what HP calls top-line business has prompted a reduction in force at the company. HP reported that 1,800 employees have taken early retirement packages, options which were offered to 2,500 people. CSY is hiring in this period, looking for technical talent and interviewing HP staff in other divisions.

The HP cost-cutting comes because of the moderate revenue growth, which was just a shade above flat for the whole company in the latest period. Steve Pavlovich, HP’s Director of Investor Relations, said, “It’s very satisfying to have brought costs and expenses into line this quarter to enable us to meet expectations with only 4 percent revenue growth.”

HP took a special $170 million charge on the period to pay for some of the retirement benefits. But most of the charge was to write down assets in its test and measurement business, a high-profit segment of HP like the HP 3000.

Pavlovich said that HP’s R&D spending was flat for the period, “not a result we expect to repeat on a regular basis. Zero growth in R&D happened to work out this quarter without jeopardizing HP’s technological leadership. We aren’t planning on making this a trend.”