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HP Axes 6,000 Jobs, Lowers Q3 Estimates

Citing the mantra du jour about the trudging state of technology spending on the consumer side, Palo Alto, Calif.'s Hewlett-Packard Co. Thursday announced it would pink slip about 6,000 people (through Q4) for an annual cost savings of $500 million.

It also reported a sales decline of 14 percent to 16 percent year-over-year for the third quarter of 2001.

HP has taken other actions to control expenses, including a "voluntary" pay cut program for which more than 80,000 HP employees signed up. As a result of this and other expense control measures, HP expects expenses to be down 2 percent to 4 percent sequentially.

"Economies around the world continue to weaken as we move through the quarter," said Carly Fiorina, HP chairman and chief executive officer. "Our consumer business is being particularly hard hit with revenues expected to be down 24%. On the other hand, our outsourcing and consulting businesses are expected to grow 20% and 9%, respectively, in U.S. dollars, 25% and 15% in constant currency; and our support business is expected to post gains of 4% in U.S. dollars and 9% in constant currency."

Hammered hardest, as Fiorina pointed out, was the market for selling PCs to consumers. Because of this, HP has been engaged with other PC makers in price wars. In fact, due to competitive pricing pressures and weak volume, gross margins are now expected to be in the 25 percent to 25.5 percent range. Rival Compaq reported a pummeling this week when it reported a profit plummet of 81 percent for its second quarter, and also announced that it would not meet earnings expectations for its 3Q. Like HP's Fiorina, Compaq's Chairman and CEO Michael Capellas said he was disappointed with his outfit's progress on the consumer side.

Fiorina remained upbeat, however, as the company has been making some plays that have brought praise from analysts. Just yesterday, HP gr abbed software maker StorageApps for $350 million. As recently as two weeks ago, the venerable firm scoo ped up battered Comdisco's technology services division for $610 million. Put those purchases together and you've got nearly a billion dollars that HP has spent bolstering its enterprise side in a short period of time.

Goldman Sachs analyst Laura Conigliaro broke down HP's performance in a report Thursday. Though she said she was lowering estimates on the company, Conigliaro said she would keep HP at "market performer." Still, she pointed out weaknesses in the firm's "consumable" space. Of particular concern are printer hardware sales, which dropped 9 percent in Q1 and 13 percent in Q2.

"While a small portion of this can be attributed to a deceleration in the growth of the installed base given several quarters of slowing hardware growth, most of the slowing is due to the falloff in add-on consumables that are sold with new hardware, some users cutting back on supplies usage, and lower unit growth," Conigliaro wrote. "These will likely be ongoing issues in the current environment, suggesting that HP's supplies growth in H2'01 could decelerate further even without further slowing in the growth of the installed base. We are now estimating a more severe drop of around $200 million sequentially in consumables revenue compared to a more modest seasonal drop of $60M in our prior estimate and in the same quarter last year."

Conigliaro also said GS would reduce Q3 revenues from $10.7 billion to $10.5 billion due to lower sales and gross margin.

The conclusion: "While we are modeling a rebound in FY'03 growth to 12% from 7.6% in FY'02, its achievability depends on growing the printing business beyond its current desktop focus and the continuing buildout of the enterprise services business. We are also forecasting that gross margins trend up gradually over time, which is dependent on improvements in services margins and the continued expansion of HP's consumables business."