By Ben Elgin Desiring some upbeat financial buzz following the sudden ouster of chief executive Carly Fiorina, Hewlett-Packard (HPQ) instead delivered lukewarm first-quarter results on Feb. 16. One week after Fiorina's exit, the computing colossus blew past top-line expectations, notching $21.5 billion in first-quarter sales -- 10% above year-ago figures. Net profits also crept up 1%, to $943 million. But bottom-line improvements were heavily bolstered by a lower tax rate and cuts to research and development.
Had HP's tax rate and ratio of R&D to sales remained static, its net profits would have dropped roughly 8%, vs. the year-ago period. The company's tax rate fell from 19.5% to 10.2% year-over-year. In addition, investment in R&D as a percentage of sales declined from 4.6% to 4.1%.
SHRUNKEN MARGINS. Even excluding costs associated with a legal settlement, HP's profits would have dropped 8%, to $859 million, without these benefits, according to BusinessWeek Online's analysis. HP has "revenue and profitability going in different directions," remarked Goldman Sachs analyst Laura Conigliaro during HP's earnings conference call.
Interim CEO Robert Wayman, who also is the company's chief financial officer, acknowledges the tightening profit picture. However, he insisted during the analyst call that cost-cutting and organizational changes should bolster the bottom line in coming quarters. "We're looking at an overall gross margin improvement," he said.
Margins may be tightening, but not all is glum for HP. Despite concerns on Wall Street that management turmoil would spark a customer backlash, there are no early signs of such fallout. BusinessWeek interviews with a half-dozen chief information officers following the management change indicate few are likely to rethink their relationships with HP based on CEO uncertainty. HP further assuaged such fears, announcing during its earnings call a $340 million contract to provide tech services to Britain's Foreign & Commonwealth Office.
LOYAL CLIENT. Investors were slightly upbeat on the news, pushing up HP's stock 4%, to $21.80, in after-hours trading.
If HP can continue to allay customer concerns over leadership and direction, it will be well served. The corporate buyers interviewed by BusinessWeek Online shrugged off the corner-office intrigue, saying it would have very little impact on their tech-purchasing decisions. Indeed, most felt Fiorina's exit was a minor twist compared to 2002's merger with Compaq, when entire product lines were being reevaluated.
"I don't think the departure of Carly is all that significant," says Don Brekke, vice-president of information technology at Greenheck, a Schofield (Wisc.)-based maker of ventilation equipment, which buys PCs and servers from HP. "HP has been very reliable and trustworthy for us. We're sticking with them."
PRICING IS KEY. Still, long-term issues around customer-retention remain -- particularly with rival computer maker Dell (DELL) garnering more attention in such new markets as printers and servers. For instance, Aquila (ILA), a Kansas City, (Mo.)-based distributor of natural gas and electricity, considers itself a big HP shop. It has been moving its technology infrastructure from IBM mainframes to HP servers. Despite being pleased with its HP relationship, Aquila is seriously considering moving from HP to Dell in printers. "We used to never even think about another printer company," says Ron Hinsley, vice-president of information technology. "[But] Dell just has a better pricing and delivery model."
If HP hopes to bolster its profit picture, it needs to do more than to allay executive-suite uncertainties, it must convince fence-sitting customers like Aquila to stay in the fold. Elgin covers Hewlett-Packard for BusinessWeek