Hewlett Packard warned yesterday that it would not meet expectations with its second quarter results, halting an upward spiral in its share price.
The company blamed the PC price war, which has eaten into its margins, but although most PC makers have suffered similarly, Wall Street was particularly harsh about HP's warning. Its share price, which has risen by 30 per cent in the past month on optimistic analyst forecasts, dropped by 12 per cent to $71 after the announcement.
The company now predicts it will report earnings per share tomorrow of about 65 cents, rather than the 77 expected by stock watchers.
Analysts angrily pointed out that HP has now disappointed expectations for five quarters running. They had remained optimistic for Q2 because the company's business is more diversified than most of its PC rivals, so it can fall back on other operations such as printers and servers, and because it appeared to have less serious excess inventory problems and a fuller order book than major competitors such as Compaq.
The main culprit was the price war in business PCs, HP said - it has been forced to reduce prices by as much as one-fifth and this business is now loss making, even though in terms of unit shipments it grew by over 70 per cent in the quarter.
But in a conference call with analysts, it said this reversal into the red only applied to the PC business. It claimed results from the printer unit, which brings in 40 per cent of HP revenue, would be "solid", calming analyst fears that margins were being cut to the bone in this sector too.
Another weakening factor was decline in the test and measurement operations, particularly because of the Asian economic crisis.
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