Blaming a variety of factors, Hewlett-Packard announces fiscal Q4 EPS that missed expectations. But despite the shortfall, the company maintained its bullish guidance for the coming year, forcing investors to decide whether they want to play along in a game that will be very hard to win.
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After direct PC marketer Dell Computer (Nasdaq: DELL) ended last week with a revenue guidance bummer, fellow computing player Hewlett-Packard (NYSE: HWP) started this week with a thud by missing earnings expectations for its fiscal Q4. In early trading, H-P's shares were being dragged across the coals for a roughly 15% loss as investors tried to get a handle on exactly how fast the company should be expected to grow in the coming year. Sound familiar? This is exactly the same type of question that investors have been grappling with for months in all areas of information technology, wrecking the share prices of companies ranging from PCs to servers to peripherals and even consulting. H-P is much more than just PCs, so explaining the current situation with the basic catch-all that the PC business is going into the crapper is a bit simplistic. The company identified all kinds of problem areas, ranging from higher than expected costs and expenses to issues with margins, hiring, bad debt, and the product mix. Year-over-year revenue growth for the quarter came in at 17%, about what analysts were expecting, but the top-line growth flowed like molasses through the rest of the income statement. Higher expenses took a bite out of operating earnings, which grew just 5% during the quarter. Bottom-line diluted EPS rolled in at $0.41 (excluding items), missing the First Call mean estimate by a dime. The company's conference call was mixed with equal doses of apologizing and confusion, with CEO Carly Fiorina the one eating the most crow about the profit shortfall and sell-side analysts engaging in the most head-scratching. "I accept full responsibility for the shortfall," Fiorina stated from the outset before adding that the quarter "raises legitimate questions about visibility" at the company. Despite the blurry corporate windshield, analysts were fed a round of fiscal 2001 guidance that was questioned almost immediately. Revenues in the coming year are expected to grow 15% to 17%, suggesting upside from the fiscal 2000 performance of 15%. Also, full-year gross margin is expected to hold relatively steady and operating expenses are forecasted to rise by only 10% to 12%, down from the 16% bump-up in the recently completed year. To cap it all off, the mean fiscal 2001 EPS estimate of $2.04 per share that was cited on the call was deemed "potentially achievable," although the company qualified that by saying it was adopting a "cautious" stance. If the profit estimate is achieved, fiscal 2001 EPS growth will come in close to 18%, up from this year's 15% growth. How all of these things are going to happen is still pretty much an open question, though H-P is not backing away from the challenge. The company has dropped the idea of acquiring the consulting business of Pricewaterhouse Coopers, an opportunity Fiorina said had "lingered too long," in order to better focus on the task at hand. But by hitching its near-term share price performance so tightly to its guidance, the company is leaving itself with little margin of error. Fiorina believes the company is in "prove-it mode" now, but the truth is that it will always be in this mode if the central message from management continues to revolve around increasing the guidance bar in order to please the sell-side analyst community. H-P is far from the only major U.S. company playing this game of guidance roulette, just one of the most recent to get burned. Rather than back away from the table, the company has decided to keep playing in the hopes of hitting the eventual jackpot of "consistent business performance quarter after quarter," as stated by Fiorina. The major choice facing individual investors at this point is whether they want to spin the wheel along with H-P or leave the earnings guidance casino altogether in the hopes of finding a game where the probabilities of winning are more attractive.
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