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August 16, 1996


By CBR Staff Writer

The effect of leaving the disk drive manufacturing business hit Hewlett-Packard Co hard in its third quarter figures, though not quite as hard as it had thought it would. Nevertheless, the statement by chief executive Lewis Platt was couched in the kind of language that makes the market react badly. The shares closed down $0.13 at $43.38, but quickly started tumbling, and were down $3.50, or 8% to $40 in after-hours trading last night. The Palo Alto company’s exit from making disk drives meant taking a $135m hit in the third quarter, it had been expecting $150m. This reduced earnings per share by $0.13 in total; $0.08 from the charge and $0.05 from operating losses at the disk drive business. It was a difficult quarter apart from the disk hoopla, according to Platt, and he said it confirmed the company’s earlier suspicions that it would be hard to grow consistently at the rates some had come to expect of HP. Overall, net profits fell 26% in the quarter to $425m, as revenue rose 1 8% to $9,105m. Orders in the quarter also slowed, up 8% on a year before at $8,700m, with US orders up a mere 4%. HP put this down to a significant order decline in the components business and ordering patterns from inkjet printer and PC resellers. Even taking into account the effects of currency translation, we’re concerned about this quarter’s slowdown in the US and Asia Pacific, said Platt. In the computer business, PC orders posted good order growth, though slower than recent quarters, with HP NetServer and mobile PCs as the strongest contributors. Unix systems and services followed the same pattern as PCs. Electronic components orders fell 39%. For the first time, HP this year is reporting orders as received, rather than when delivered. The cost of goods line continues to rise at HP, which worried the markets last quarter (CI No 2,915). It was 68% of revenues last quarter, up from 63.4% a year before and 65.8% in the second quarter. This too was affected by the disk drive exit and losses there, but also by competition in inkjet printers and workstations. Leaving aside the disk drive happenings, it was still 66% of revenues. F or the nine months to the end of July, net profits were up 10% to 1,938m, on revenues that were up 26% at $28,273m. Orders were up more than 20% to $28,900m compared to a year ago. Looking to the future, Platt, never one to sugar-coat it, said factors other than the one-off disk drive exit including a slow-down in some economies around the world, could remain challenges in the months ahead, adding that the near-term outlook in our business looks uncertain. Still, at this rate, HP looks like heading for between about $35,000m and $38,000m for the year.

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