FlashPaper Dec. 2001: HP Q4 pulled off analyst heat, but founding shareholders eyed the merger

December 2001

HP’s Q4 pulled off analyst heat, but founding shareholders eyed the merger

HP posted fourth quarter results that beat analysts’ estimates, performance that earned kudos like “Nice quarter” from normally skeptical financial analysts in a conference call. The company shed nearly 90 percent of its profits for the period but posted earnings of 19 cents a share after some changes in reporting, beating the estimates of 8 cents per share and lifting the stock price back into the 20’s after two months of languishing in the teens. The numbers weren’t rosy for the computer businesses inside HP, however, something that experts expected the Packard Foundation to study in mid-December while it tries to decide how to vote its shares on the proposed Compaq acquisition.

While the results of a company moving away from the 3000 platform might be of marginal interest to those sites using only HP 3000s and Homesteading with them, customers considering other HP solutions as a Migration target would do well to heed the potential of the company’s computer operations. HP managed to pay two days’ bonus to its employees instead of the usual profit sharing, since there’s only a fraction of profits to be shared compared to last year. The computer systems business saw a 31 percent decline in its revenues during a fiscal year that CEO Carly Fiorina called “one of the toughest in the technology industry’s history.” While she pointed out that HP had a full year of profitability, its PC business declined by 44 percent, the sector where it plans on doing more business if the Compaq merger should be approved. Fiorina said she believes the deal is critical to HP. “We don’t have the luxury of an incremental approach,” she told analysts in a question and answer session. “We have to take the bold step of addressing these challenges now.”

Those challenges include rising debt and industry skepticism about HP’s ability to make investments pay off. HP has cash balances of $4.39 billion in cash and securities, and it generated $1.8 billion of operating cash flow in 2001, according to its latest balance sheet for the fiscal year. But the numbers show the ratio of debt to earnings before interest, taxes, depreciation and amortization hit 1.6:1, compared with 0.9 in 2000 and 1.0 in 1999. HP's holding a half-billion more dollars in debt this year, while profits have been harder to come by. Because of this, Bear Stearns has rated the company's bonds as “unattractive.” Those profits have come largely from the non-computer businesses in HP, now bigger than ever. The Q4 situation is expected to be included in a report the Packard Foundation received Dec. 7 from an outside consulting firm. Some financial analysts say the fourth quarter’s profit came from cost-cutting — thousands lost jobs in the period — and better performance in printing, not computers, which will be a larger business unit if the merger goes through.