HP fourth quarter report sets off market slide

HP broke disappointing news early to Wall Street analysts during November, reporting its earnings fell 10 cents per share short of the Street’s expectations for the fourth quarter of fiscal 2000. The HP report showed the company increased its profit by more than 20 percent for the period, but its $922 million on $13.26 billion in sales was less than analysts were primed to count on.

The unexpected news of HP results sent the tech-heavy NASDAQ market into a 5 percent fall on Nov. 13. HP’s shares fell 13 percent with the report, which the company released two days early. A week later HP announced it will spend $2 billion to buy back its stock in an effort to drive up the value of its shares.

Despite beating its fourth quarter numbers for last year in both earnings and revenues, and finishing at more than $48 billion in sales for the year, missing earnings expectations led to harsh scrutiny of the company’s growth management.

CEO Carly Fiorina took full blame for the shortfall, which she attributed to “the confluence of a number of issues that we now understand and are urgently addressing. Issues that reduced profitability included margin pressures, adverse currency effects, higher-than-expected expenses, and business mix. The good news is that our business is healthy, demand is strong, and we are making good progress against our strategic objectives as we continue the hard work of reinventing HP. We are determined to succeed and are not backing away from our growth targets.” HP’s business mix at present sees low-margin systems and products experiencing sales and order growth.

Fiorina said HP paid unexpected costs in extra incentives to a sales force which delivered in the fourth quarter, “an increase in field selling costs that significantly exceeded our expectations.” Sales incentives were tied to year-end closing performance, something the company must have been aware of when announcing the plan in a sales shakeup last year. HP is rethinking the level of incentives. HP also took hits in currency exchange, spent more than expected in hiring 2,100 new people available due to dot-com meltdowns, and wrote off losses related to its own investments in dot-com customers.

Among the problems some analysts noted was a weakness in the high end of HP’s Unix business, a place where Sun and IBM Unix offerings are succeeding more often with resellers. Superdome was no help, since it won’t ship until next year. HP’s quarterly report said sales were strong in the midrange of its Unix line, as Fiorina detailed a 23 percent rise in that segment of Unix revenues for the fourth quarter. Unix growth is being sparked by sales to the service provider markets, and HP is ramping up its A-Class production on the low end — a unit that will be available as an HP e3000 model next year. No mention of the HP 3000 business was in the report or Fiorina’s conference call with analysts.

The CEO, now the chairman of the HP board, also announced that HP has withdrawn its offer to acquire PricewaterhouseCoopers, the IT consulting firm which it had extended an $18 billion stock offer to purchase. Fiorina said that the value of the PwC acquisition had become questionable in market conditions which have seen HP’s stock lose 23 percent of its share price this year.

“Given the current market environment, we are no longer confident that we can satisfy our value creation and employee retention objectives,” Fiorina said. “I am unwilling to subject the HP organization to the continuing distraction of pursuing this acquisition any further.”

Some analysts said that having to cancel the PwC deal cost Fiorina points in the HP boardroom, and the CEO’s unquestioned lure over Wall Street was at an end. The Industry Standard quoted analyst Shebly Seyrafi of A.G. Edwards as saying, “The honeymoon is over with respect to her aura of invincibility. This was a major miss.”