Posted 2/27/2003 1:31 AM Updated 2/27/2003 3:29 AM
As H-P shares plummet, accounting change worries some
By Jon Swartz, USA TODAY
URL:http://www.usatoday.com/tech/techinvestor/2003-02-27-h-p2_x.htm
SAN FRANCISCO — Shares of Hewlett-Packard plunged 15% Wednesday after it said it missed its quarterly revenue target, reviving doubts about H-P's controversial acquisition of Compaq Computer last year.
H-P's fiscal first-quarter revenue of $17.9 billion, reported late Tuesday, was $600 million shy of analysts' estimates because of weak domestic sales and war jitters.
Reuters file
Fiorina
But a change in H-P's accounting practices also raised concerns for two prominent Wall Street analysts. They say the change makes it more difficult to gauge the profitability of H-P's five business groups.
"You worry when someone moves the finish line," says Andrew Neff of Bear Stearns. "H-P's January quarter was far from clean," Goldman Sachs analyst Laura Conigliaro wrote in a research note.
Citing the new method of recording revenue and profit, she reduced her rating on H-P to "in-line" from "outperform."
The most striking change in performance: H-P's PC division. It posted a $33 million profit in the quarter — the first in more than two years — amid tepid demand and vicious price cutting. Neff says the accounting change, at the very least, played a big role in the turnaround.
He estimates H-P took about $40 million in costs from the PC unit during the quarter and moved them to a more general category. He says that may have made the difference between its profit and what he estimates could have been a $7 million loss.
H-P disputes his figures. It says it would have reported at least a $10 million profit in its PC division without the accounting change. It attributed the PC profit to cost cuts and improvements in operations.
The PC division is being closely watched. The biggest criticism against the merger was that both H-P and Compaq were individually losing money on PCs and that combining the two would only put a strain on H-P's overall operations. H-P Chief Executive Officer Carly Fiorina repeatedly countered that she could make a combined PC operation profitable.
Fiorina, speaking at an analyst conference Wednesday, said claims of expense shifting to inflate profits in business units is "simply not true."
H-P changed its accounting practices after it merged with Compaq last year. The results showed up for the first time in the fiscal first quarter. Among other things, H-P shifted some costs, including research and development, from its five business groups to an "eliminations/other" category. It also changed how it accounts for bonus payments to employees in each business group.
For example, H-P and Compaq lost a combined $532 million in PC operations in fiscal year 2002. With the accounting change, the loss would have been $372 million, Neff says. H-P's overall bottom line number would not be affected, the company says.
Four H-P business units reported quarterly profits Tuesday and a fifth lost less money. Fiorina called it the "best overall profit performance since the merger." Prior to the Compaq merger, H-P made money on printers and lost money on everything else.
Fiorina won shareholder approval of the bitterly contested Compaq merger with promises of cost savings and meeting financial targets. Though H-P has improved results with deep cuts, including 17,900 layoffs, some H-P watchers wonder if more cuts will come if revenue doesn't improve |
