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$2B Loss For The Newest HP

Only printers and services turned a profit for Hewlett-Packard in the third quarter.

Hewlett-Packard reported a net loss of $2 billion for its first quarter of combined operations with Compaq, as the company absorbed $3 billion in expenses related to layoffs and other merger costs. But execs promised better performance for the current quarter as the new HP wrings costs from its money-losing PC and server businesses.

For the fiscal third quarter, ended July 31, HP reported a net loss of 67 cents per share, compared with a profit of $123 million, or 6 cents per share, a year ago. Revenue was $16.5 billion, compared with $10.3 billion a year ago. HP and Compaq's combined revenue during the comparable quarter last year would have been $18.6 billion. The companies completed their merger May 3.

"This is a challenging period, not just for our company, but for the whole IT sector," CEO Carly Fiorina said during a conference call with analysts Tuesday. Recent data suggest "continued weakness in IT spending," she said, adding that a recovery is "not happening in the second half of '02."

During its third quarter, HP reported $1.6 billion in pretax expenses for restructuring and $1.4 billion in other acquisition costs. HP has said it plans to lay off 10,000 workers this fiscal year, nearly half of which was done in the third quarter. Excluding those items, HP's earnings would have been 14 cents per share. The company also told analysts that it's still comfortable with fourth-quarter earnings estimates of 22 cents a share. HP says it's on track for cost savings of $500 million this year and $2.5 billion in fiscal 2003 as a result of the merger.

HP derived about 29% of its third-quarter revenue from its printing and imaging division; 29% from PCs and handhelds; 23% from servers, storage, and software; and 18% from IT services. Only printers and services turned a profit, though.

HP lost $198 million on its PC business and $422 million in its enterprise systems group. PC sales fell nearly 19% from a year ago for the combined companies, and sales of corporate computer systems declined 22%. HP president Michael Capellas said the company "can't predict when" those markets will recover, but he predicted that cost-cutting, more direct sales to customers, and a "major push to gain share" in the small- and midsize-business market will help the company make a profit on PCs by the first half of the 2003 fiscal year, which begins Nov. 1.

HP's enterprise systems group is the company's "biggest challenge," Capellas said, because HP and the former Compaq need to fuse their sales staffs. But the corporate computing business could be a "major lever" for profitability in the future. Despite the loss, unit shipments of HP's high-end Unix Superdome server rose 9% during the quarter, and shipments of servers based on 32-bit Intel chips increased 18%. Capellas said enterprise group performance would improve in the fourth quarter.

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