HP gets ready for hard times

The economic malaise that began in North America and spread to Europe is now hitting Asia and Latin America, Hewlett-Packard chief executive Carly Fiorina said Wednesday.

The economic malaise that began in North America and spread to Europe is now hitting Asia and Latin America, Hewlett-Packard chief executive Carly Fiorina said Wednesday.

CUPERTINO, Calif. - "We are now becoming more convinced that this is a global information technology slowdown that may last for some time," Fiorina said at the beginning of HP's semiannual meeting with financial analysts. Initially, countries such as Korea and Mexico that are dependent on U.S. exports were affected, but now the problems have spread to the rest of Latin America and China, she said.

The resulting reductions in computer technology spending, on top of problems specific to HP, have made the company "more cautious about our outlook (for) revenue growth" ranging from "flat" to down 5 percent for the current quarter, Fiorina said.

The Palo Alto, Calif.-based computing stalwart will take additional cost-cutting measures to try to meet analyst forecasts for earnings of 23 cents per share for the company's fiscal third quarter ending July 31, Fiorina said.

It's not the first time Fiorina has decisively stated dire views. At the CeBit trade show in Germany in March, she warned that economic troubles had spread to Europe.

Fiorina's words stand in contrast to remarks Wednesday from Intel that no future layoffs will be required--a more optimistic view of the spending slowdown and how much longer it will last.

Fiorina, since taking over as CEO in 1999, has embarked on a major overhaul of HP, including major changes to executive and lower-rung staff. A total of 50 percent of the company's top 200 executives are new, and a quarter of them were hired from outside the company, she said. A third of HP employees have been working at the company for less than three years and a sixth for less than a year.

The biggest issue facing Fiorina at HP has been that she arrived with a plan for transforming the company during a tech boom--but wound up facing the opposite climate, said Mark Specker, an analyst at Wit SoundView. "She was preparing to ramp for a growth push," he said.

Changing half the top 200 managers in a year isn't a surprise, Specker added. What is surprising is that it took as long as it did. HP has taken several measures to cut expenses in the first half of its fiscal year and plans more, Fiorina said. Delaying pay raises saved $145 million, and current efforts to trim those raises will save a further $170 million. In the first half, eliminating bonuses saved $205 million, and cutting marketing expenses saved another $125 million. Travel and entertainment budget cuts saved $75 million in the second quarter. And HP is requiring employees to take eight days of vacation.

The company is balancing new hiring with attrition and layoffs to keep its employee count stable around 93,000, Fiorina said. The worst-performing 18 percent of employees are leaving HP, but HP is hiring as needed.

"The lowest performers in our business are leaving," Fiorina said. "We are very focused on building a meritocracy."

HP is hiring in areas such as services employees, especially in consulting and running other companies' operations, research and development, and salespeople in areas such as storage systems.

But HP is holding the line in some areas--even in the company's computer system sales, a division that is losing money and will continue to do so for the next "couple quarters."

"We will not engage in bloody price battles" as have Dell Computer, Compaq Computer and Gateway, she said.

Merrill Lynch analyst Tom Kraemer was skeptical in a research note released Wednesday, saying the protracted PC sales slump and HP's retail weaknesses may hurt the company further. "HP's problems in the channel have not yet been fixed, and HP may never regain the foothold it once had," Kraemer wrote.

And the company found that one of its cost-cutting measures was too aggressive, said Chief Financial Officer Bob Wayman. HP is aiming to cut $1 billion by 2002, curbing the money it spends on buying its own computers, travel, human resources and other internal projects. But the company won't cut so much from its own computing system budget after all, Wayman said.

"We realized the planned reduction of information technology (IT) spending was too aggressive," he said. Now, HP will further reduce areas such as human resources to make up for the less drastic IT spending plan.

Problems specific to HP include conflicts with partners that sell HP equipment and mismatches in the numbers of salespeople for particular segments.

From 2001 to 2004, HP projects its overall market will grow about 10.5 percent, Fiorina said, and the company's revenue growth goal is about 10 percent to 12 percent.

Fiorina also said the company is backing away from its plan to acquire a services company. The company instead is working on partnerships with services companies.

"We're not ruling out acquisitions, but I don't have a target in mind," Fiorina said.

HP shares were down $1.13, or 3.7 percent, to $28.92 in midday trading.

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