HP’s Profits Improve But Disappoint

Sluggish sales of desktop computers and servers pinched Hewlett-Packard
‘s bottom line during its third fiscal quarter, but the
systems vendor reversed its losses from last year with a profit of $297
million, or 10 cents per share.

The results were a far cry from last year’s third fiscal quarter, when HP
declared a net loss of $2.03 billion, or 67-cents per share, as HP and
Compaq Computer were in the thick of merging the two companies.

During the quarter ending July 31st, HP’s revenue was $17.35 billion, up
5 percent from the same, year-ago period but down by 4 percent from the
quarter before.

“The third quarter is always tough,” said Carly Fiorina, HP chairman and
chief executive officer. But the company should have done better, her
statement said.

“Our challenge in the Personal Systems business continues to be desktops,
particularly in the U.S., where reduced volumes due to seasonality, and in
some cases, our own overly aggressive pricing actions negatively impacted
gross margins,” Fiorina said.

Revenue in the division was $4.97 billion, up 5 percent from last year,
but down 3 percent sequentially. Desktops sales might have slipped but HP
notebooks sales were among the stellar performers, with revenue up 27
percent from last year. Despite the boost from notebooks, however, the
division lost $56 million in the quarter, albeit narrowed from the $140
million loss from last year’s third quarter.

Fiorina pledged to return the division to profitability in the fourth quarter.

Imaging and printing continued to be HP’s mainstay as well, with revenue
growth of 10 percent to $5.24 billion, but down 5 percent from the second
quarter. Fiorina said the division’s profit of $739 million was back to
normal levels even with expenses 20 percent higher for R&D and other product

HP’s popular ProLiant servers helped offset a rough quarter for the
enterprise division, whose $3.71 billion in revenues were flat
year-over-year and were down 4 percent sequentially. Operating losses for
the quarter grew to $70 million, up from a loss of $7 million in the prior
quarter, the company said, which was due in part to business seasonality and
top line weakness in addition to planned expenses related to HP’s Integrity
server launch.

HP’s services revenue came in at $3.08 billion, up 5 percent year-over-
year and 2 percent sequentially. The company said growth was led by managed
services, which reported revenue gains of 21 percent year-over- year.
Overall, the division posted an operating profit of $337 million, up 1
percent from the second quarter.

Unit shipments of servers were up 16 percent for standard servers.
However, mid-range and UNIX-based servers were weak, the company said, as
were enterprise sales in Europe and Japan.

In a related development, the Securities and Exchange Commission (SEC) today levied a $750,000 fine against Deutsche Asset Management, (DeAM’s) the advisory unit of the bank, for failing to disclose a material conflict of interest in its voting of client proxies for the 2002 merger between
HP and Compaq.

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