HP, like other companies, pre-annnounces financial results when things are going better or worse than Wall Street expects. This allows it to take its kudos or lumps in installments rather than all at once on the day the financial results actually come out. HP got a lot of lumps yesterday, because it missed its targets…
It is a fair guess that Hewlett-Packard’s chairman and CEO, Carly Fiorina, was not happy yesterday morning, as the company felt compelled to pre-announce its fiscal Q3 financial results.
Before the market opened Thursday morning, HP announced that overall sales in its fiscal third quarter ended July 31 were $18.9 billion, up 9%, and net earnings were $586 million, up 90%. In this IT market, those percent changes don’t sound that bad.
So what is Wall Street so upset about that it sent HP’s shares down 17% in early morning trading on Thursday? For one thing, HP booked $20.1 billion in sales in the fiscal second quarter and had $884 million in net profits, which worked out to earnings of $0.29 a share. For another thing, depending on who you ask, Wall Street was expecting something closer to $0.31 a share in the fiscal third quarter, not the $0.19 that HP expects to book when it posts its official results next Wednesday.
According to the statement HP released, the culprit was its Enterprise Servers and Storage unit, which had caused the company to miss its revenue and earnings targets in the fiscal third quarter of 2003 as well. Back then, HP was shy a few hundred million dollars in sales and a few pennies per share of profit, and Wall Street didn’t react kindly then, either.
HP’s Technology Solutions Group, the umbrella organization that sells servers, storage, services, and software, will report sales of $7 billion in the fiscal third quarter, up 4% from this time last year. However, operating profit for this unit, which accounts for a third of HP’s sales, was $56 million, down 79% from the $265 million in operating profits it posted in last year’s also-poor showing in the third quarter of fiscal 2003.
Within the Enterprise Servers and Storage division, sales were actually down 5%, to $3.4 billion. After boasting that the Enterprise Servers and Storage unit was profitable in the fiscal second quarter, the unit is back in the red, reporting an operating loss of $208 million, considerably worse than the $20 million operating loss in last year’s third quarter.
So heads will roll inside HP. Ms Fiorina said as much in her statement accompanying the preliminary results for the quarter. Although we are satisfied with our performance in Personal Systems, Imaging and Printing, and Software and Services, these solid results were overshadowed by unacceptable execution in Enterprise Servers and Storage, she said. We therefore are making immediate management changes. We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter. That sounds like a threat as well as a promise.
While the miss in the third quarter was bad, Wall Street seemed to be upset by the fact that the company lowered its earnings targets for the fiscal fourth quarter. HP estimates that sales in the fourth quarter will be in the range of $21 billion to $21.5 billion, and non-GAAP earnings per share will be in the range of $0.35 to $0.39. The way things work, the GAAP numbers will be smaller – perhaps a little, perhaps a lot. HP said that it knows there will be at least five cents in charges related to acquisitions and the amortization of intangible assets in the quarter.
HP said that Q3 was adversely affected by the migration to a new order processing system in the United States and that this disrupted its supply chain system. The company also said that in Europe, the channel was giving it woes concerning compensation, overly aggressive discounting, and the transition to a new channel claim processing system. HP also said point-blank that the storage business had sales that were significantly below the company’s forecasts, and that finally the normal uptick in sales at the end of the quarter was muted. It may have been muted, in fact, by issues with the channel. HP said that other business units did decently in the quarter.
