H-P to detail post-merger targets
By Mike Tarsala, CBS.MarketWatch.com
Last Update: 2:06 AM ET May 11, 2002
NEW YORK (CBS.MW) -- Hewlett-Packard is scheduled to post second-quarter earnings Tuesday, along with the company's first quarterly financial targets in the wake of the Compaq merger.
The financial targets are expected to give shareholders their first look at how discontinued H-P and Compaq products and planned cost cuts, including the eventual firing of 15,000 workers, will sway sales and profit over the coming months.
A conference call with analysts following the earnings report is expected to give many on Wall Street a better idea of how much short-term revenue will be lost as a result of the merger, compared with the total revenue H-P and Compaq were expected to produce separately.
"We expect revenue leakage on the order of 10 percent, compared with the separate companies' revenue," said Richard Chu, analyst with S.G. Cowen Securities. "But it's so hard to tell. Right now, you're taking forecasts for Company A and Company B and subtracting C, which is unknown."
Analysts are at odds over how quickly the merger will lead to sales declines. In certain sectors, a sales drop will be immediate, according to Chu, as the company cancels product lines, such as its Jornada hand-held computers, in favor of Compaq's hand-held Ipaq.
But the steepest sales drop-off won't be immediate, said Walter Winnitzki, analyst with First Albany Corp. Customers will continue to buy H-P and Compaq products, until they have time to see if the combined companies' offerings will meet their overall needs.
"It's possible that the losses in revenue might not accrue for a year or so," Winnitzki said. " If you're a big customer, it takes time to change. Over a period of a few quarters, customers will start to leave, as they make new purchases elsewhere, and re-evaluate long-term technology decisions."
There's a potential for earnings upside in the next few quarters, despite the likely sales declines, some analyst said. The key will be squeezing out more merger efficiencies than planned. The company has committed to chopping $2.5 billion in costs -- largely a result of reduced staffing and buying components in greater bulk.
Bob Wayman, H-P's chief financial officer, said when the company officially launched Tuesday that H-P will save at least 1 percent on its ordering costs due to the merger. He said that some analysts project the company can save as much as 4 percent.
The first round of job cuts, which could immediately save H-P millions, are expected Monday. Company executives have said the bulk of the layoffs will take place over the next six months.
Earnings estimates
H-P is one of the only companies that stands a chance of beating Wall Street earnings targets in the next six to 12 months -- almost entirely due to cost-cutting potential, Winnitzki said. Most other tech companies have cut almost all they can, and are now counting on increased sales in to boost their profit, despite a continuing customer spending slump, he said.
If H-P can limit the revenue loss of the combined company to 5 percent and manage to beat its projection of $2.5 billion in cost savings in the first year of the merger, then it's a "cheap stock" added Marty Shagrin, analyst with Victory Capital Management in Cleveland.
He anticipates that H-P management will have even more to say about the potential for beating cost-cutting goals when they host a session with analysts at the end of May or early June.
But long-term, cost cuts will not play a large part in the merger's success or failure, according to Winnitzki.
"Historically, the thing that has caused mergers to fall short of expectations has not been the cost-cutting," he said. "It's what happens to your customers, and growing revenue when you put all the pieces together."
H-P's management is likely to bemoan customer spending in the conference call, like other tech executives did in the first quarter, said Dan Niles, analyst with Lehman Bros. in San Francisco.
But most analysts anticipate the company will come close to its second-quarter earnings targets, which will be tallied for H-P as a separate entity.
H-P is expected to report earnings of 25 cents a share on sales of $11.1 billion, on average, according to a survey of analysts conducted by Thomson Financial/First Call. The company earned 17 cents a share on sales of $11.1 billion in the year-ago period.
Although it's possible the company might fall short on sales, most analysts said the company isn't about to report a disaster quarter. If it was, management would have had to pre-announce earnings by now.
Shares of Hewlett-Packard (HPQ: news, chart, profile) fell 75 cents to $19.526 Friday on the New York Stock Exchange. |
