Server sales stable in HP’s latest report

Profits plummet in Q2 as HP hopes it’s reached bottom

Hewlett-Packard reported its enterprise server revenues declined only 1 percent between this fiscal year’s second quarter and last year’s, and it rose 2 percent since last quarter. The news was a thin ray of hope that the company’s business declines may be at an end.

Second quarter results released in mid-May showed HP posting two-thirds less profit than in its 2000 second quarter, a decline analysts traced to the falling sales in the company’s high-profit print and imaging business. Some analysts estimate that half of all HP’s profits come out of its lucrative sales of printer supplies.

Results concerning HP e3000 business remained buried inside more widespread numbers for HP’s “Unix server business” and “Computing Systems” segment. HP reported the former figure was only off by 1 percent from the prior quarter, but was down 13 percent from last year’s second quarter.

The e3000 division’s Worldwide Marketing Manager Christine Martino earlier said she expected strong results for the server in the quarter. “I think we’re going to have a pretty terrific quarter,” she said in the weeks before the Q2 numbers surfaced. “It really shows our customers have been waiting for these new systems.”

HP’s overall Computing Systems numbers — a much broader slice of the company’s business, including NetServer results — showed a $130 million loss for the quarter, more than six times as much red ink as Q1. It was a complete reversal from the 2000 Q2’s $183 million in profit for the segment.

In the current era of economic uncertainty, reporting a marginal decline in server revenues might be translated as stemming the slide for HP. Investors greeted the report with such optimism, driving the stock up $4 a share into the low $30 range, where it remained in the weeks that followed. The stock had fallen to a 52-week low of $25 in the days before the Q2 report.

But the dwindling profits remained a concern for many analysts, as well as HP itself. The company’s operating expenses grew 5 percent to 22.1 percent of net revenue, up from 20.3 percent for last year’s second quarter.

HP has spent $102 million so far in fiscal 2001 for “Marketing Realignment,” one example of the cost of revamping the company to follow CEO Carly Fiorina’s new vision for HP. The CEO said the company was paying the cost of its revisions now, to reap benefits later. In times when many companies are reporting lower profits and revenues, HP has internal challenges as well.

“We can’t pin all of our issues on the economy,” Fiorina said. “We’ve previously acknowledged the work we’re doing in our enterprise business to reinvigorate channel and go-to-market programs. The systemic, structural changes we are making in these areas are not quick fixes, but we’re making steady improvement day by day.

“This was clearly a tough quarter, but there are also signs of real progress. In our consumer business, revenues declined 8 percent, but we maintained or gained share in every category in which we compete and remain profitable. Revenues in our enterprise business declined 1 percent year over year, but were up 2 percent sequentially.”

HP’s best fiscal news came from its Services business, one of six major business segments in the company. HP Services, now being run by long-time HP veteran Ann Livermore, posted $1.9 billion in sales in the second quarter and $115 million in profit. It was the only segment of HP’s business to post numbers equal to or better than the dizzying heights of Year 2000’s second quarter.

CEO Fiorina said the best HP might hope for in its coming quarter was no further slide in revenues. The company met its downgraded estimates for profits in the period, posting $324 million in earnings for the period. But a return to any growth in revenue for the company is still at least 90 days away, according to Fiorina.

“Given continuing deterioration in key economic indicators and increasing global uncertainty, we think broadening the revenue range slightly, from flat to flat-to-down-5-percent, is prudent,” Fiorina said.

Searching for a way to present some positive news, HP has begun to compare its current quarter results to the period just previous. These numbers show that HP’s US revenues increased by 5 percent over the prior period, while Asia-Pacific revenues rose by 3 percent. But using the same time period as a measure, overall HP revenues in Europe dropped 13 percent between first and second FY2001 quarters.

“Our results continue to be impacted by significant macro-economic challenges, and particular weakness in consumer and capital spending in the US and Europe,” Fiorina said. HP had to write off more than $100 million in consumer goods during the period, as well as pay for canceling an expansion of its inkjet printer business — a cost of $52 million.

A Wall Street Journal report on the results included a quote from Chief Financial Officer Bob Wayman saying HP isn’t sure when its turnaround will begin. Forbes magazine, in articles sharply critical of Fiorina’s leadership, noted that HP ramped up its spending just as its sales were falling. HP pulled overall control of expenses from Wayman and farmed them out to individual business units, a change that has since been corrected.

Financial analysts who had hailed Fiorina’s vision last year had more sober assessments for the company’s near future after seeing the Q2 numbers. “I don’t think we could have expected much more,” said J.P. Morgan analyst Daniel Kunstler. “This is a very rough economic environment out there.”