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September 2000

Wall Street challenges HP’s Q3 spin

Quarter shows revenue growth, but Unix falls short of HP goals

HP posted a quarter that showed more than $1 billion in profits, met earnings expectations, and announced a stock split for this fall. So why are financial analysts complaining about the company’s Unix results?

Wall Street was upset at HP’s spin regarding Unix growth, a hard sell coming straight from the CEO. The latest HP quarterly report showed a company reporting 15 percent more revenue than its prior third quarter, pointing to market gains in its PC and printer businesses which make up more than half of all HP profits. But those strong summaries were overshadowed by CEO Carly Fiorina’s comments on HP’s growth of its Unix business, a spin one analyst called “bullish” — while others described other bull-like qualities.

The stock dropped 10 percent in the day following Fiorina’s telephone conference with security and financial analysts, who questioned the CEO closely on the 13 percent growth reported in Unix server sales for the period that ended July 31. HP had predicted growth of at least 10 points higher for the period, which led Fiorina to say its Unix business was up against a “tough compare” for the prior period.

Sales of the low-cost Unix L-class servers were up for the period, but the company’s N-Class Unix server revenues were flat for the quarter, and high-end system sales were down. Fiorina downplayed the fact that the company fell short of its goals for growing its Unix business. Analysts said IBM and Sun’s Unix growth was 30 to 60 percent for the period.

The company also reported earnings of 99 cents per share for the third quarter, but its totals included profits from favorable currency exchanges and a better tax rate. “What you are seeing is very focused expense management, improved margins and very targeted product marketing,” Fiorina said in the conference call. “Any way you slice it, we beat estimates by a wide margin.”

Wall Street forecast profits for the company at 85 cents a share. With the special items above discounted, some analysts said HP’s performance only beat the estimates by a few cents. And while HP’s sales growth against its Q3 1999 figures was 15 percent, it posted no revenue growth versus its Q2 in the US. Sales dropped nine percent in Europe for the company in the third quarter from FY 2000 second quarter revenues.

A Bank of America research note published after the meeting with analysts questioned whether HP’s view of its business can be believed in future reports.

“The market will likely take a more skeptical view of HP’s 100 percent bullish approach to dealing with Wall Street under the new CEO,” said securities analyst Kurtis King. “Management came up short of some key guidance metrics in 3Q, and in our view wasn’t entirely credible in dealing with some of the concerns that were raised on last night’s conference call.”

In more than 20 minutes of commentary on the company’s performance, Fiorina didn’t make specific mention of the HP 3000 results for the period. The system’s results would be included in the Computing Systems segment of HP business, which grew 12 percent in revenue over the last fiscal year’s third quarter.

The company announced it will split its stock 2-for-1 on October 27, the first split in four years for the company. It will also divest itself of some software operations.

 


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