Dreary Year Ends With HP's Fiorina On DefensiveDreary Year Ends With HP's Fiorina On Defensive

Amid an earnings report that slightly beat analyst expectations, Hewlett-Packard CEO Carly Fiorina offered a detailed justification of the company's pending--and increasingly controversial--acquisition of Compaq. Confronted with the publicly expressed doubts of the families of founders William Hewlett and David Packard, Fiorina devoted most of her prepared comments during a conference call with analysts to explaining why she and the HP board of directors are convinced they need the $25 billion deal.

Acquiring Compaq, Fiorina said, "will accelerate our overall strategy and strengthen our position in virtually every category in which we compete." She said the benefits would be especially noteworthy in the enterprise computing business, where HP is in danger of "becoming marginalized" in a market with fewer and fewer vendors. Fiorina also said Compaq's strengths will help HP bolster its position in the markets for servers, IT support, PCs, and storage.

Her business case summarized, Fiorina shifted to comments that seemed to be geared toward quelling shareholder concerns. She admitted that the challenges HP faces would take too long to overcome internally. "Perhaps we could address each of these challenges incrementally, step by step, over the months and years ahead. But in my view, and in the view of our board of directors, we don't have the luxury of an incremental approach. We need to take a bold step to address these challenges now," she said. "Change and risk-taking can be unsettling, even frightening for some. But preserving the status quo and taking small steps to improve our competitive position will not serve anyone's interests."

The numbers appear to support Fiorina's concerns. While fourth-quarter results were slightly better than expected, year-end figures were indicative of a struggling company. Nowhere was this more evident than in HP's computing systems segment, where revenue dropped off 31% from fiscal 2000.

Illuminata analyst Gordon Haff says that while HP's year-end numbers are respectable in comparison to its competitors, it's the printer and toner business that's been carrying the company through the economic downturn. And Haff notes that HP execs have leaned heavily on that segment. "They don't highlight the computer systems business as a driver behind results one way or the other," Haff says. "Computer systems aren't dragging them down, but they're also not delivering profits."

For the fiscal year ended Oct. 31, HP posted a profit of $408 million, or 21 cents a share, on revenue of $45.2 billion, compared with a profit of $3.7 billion, $1.87, on revenue of $48.9 billion last year. For the just-completed quarter, HP earned a profit of $97 million, or 5 cents a share, on revenue of $10.9 billion, compared with a profit of $922 million, or 45 cents, on revenue of $13.3 billion for the same period last year.