Short Takes - Financial Watch:

HP Says Charges Drive $2 Billion Loss

No. 1 PC and printer maker Hewlett-Packard Co. on has posted a massive $2 billion quarterly net loss owing to costs for merging with Computer Compaq Corp, but pleased Wall Street by saying consolidation plans are right on track.

Shares of the Palo Alto, California-based company rose in after hours trading, buoyed by an operating profit that excluded charges and came in line financial forecasts.

HP lowered its revenue outlook for the current quarter, bringing it in line with more pessimistic views on Wall Street, and blamed the revision on the weak economy, which many investors said was reasonable.

"They are not trying to snow us," said Roy Papp, managing director of L. Roy Papp & Associates and an HP shareholder. He said the one quarter did not prove the merger would work, but it was a good sign. "They apparently did the things they said they would do," he said.

HP reported a net loss of $2.0 billion, or 67 cents a share, in its fiscal third quarter, ended July 31. A year earlier, the combined operations of HP and Compaq would have reported a loss of $116 million, or 4 cents per share.

The $18.7 billion merger of the two computing giants closed back in May.

Excluding a number of items, primarily related to the merger, HP reported a profit of $420 million, or 14 cents per share, compared with a profit of $320 million, or 11 cents per share, a year earlier and in line with forecasts of Wall Street analysts polled by Thomson First Call.

Third-quarter revenues eased to $16.5 billion from $18.58 billion last year. That was $200 million shy of the $16.7 billion in revenues that analysts had been expecting.

HP stock climbed as high as $14.70 in after hours trading on the Island system from its regular close of $14.21 on the New York Stock Exchange. Earnings were released after the close.

Focus On Merger

"Given the tough economy and a major integration, we did well," said Chief Executive Carly Fiorina. She was the driving force behind the $18.7 billion merger that closed on May 7 after shareholders narrowly approved it in the face of heated opposition from members of founding families the Hewletts and the Packards.

"The key is that everything is on track and they confirmed the guidance for next quarter," said Sunil Reddy, portfolio manager at Ohio's Fifth Third Bank.

HP said it cut 4,740 employees from the work force and was on target to cut 10,000 by the end of fiscal 2002. The company also said it was comfortable with analysts' forecasts of fourth quarter earnings of 22 cents a share on revenue of $17.44 billion. That would put revenue for the last half of the year about $1 billion to $2 billion below HP's June forecast.

"All of us are seeing a few new signs of weakness," Chief Financial Officer Bob Wayman told Reuters.

Backers have said the merger gives HP more room than rivals to improve in the tight economy, since it can cut plenty of costs while joining the two companies.

But HP faces tough competition from rival Dell Computer Corp, which aims to regain the leading position it lost due to the merger of HP and Compaq, and which has signaled it will challenge HP in its most profitable area, printers.

HP introduced new photo printers that were well received and had solid supply sales, leading to an operating profit in printers of $813 million versus $343 million last year.

Chief Operating Officer Michael Capellas said HP could turn a profit in its PC division in the first half of 2003 due to cost cutting.

The operating loss in the personal systems group, which includes PCs, narrowed to $198 million from $372 million. Enterprise systems showed a $422 million loss due to pricing pressure. HP reported some weakness in its services arm, where the operating profit fell to $275 million from $384 million.

HP shares have fallen 23 percent since the Compaq merger closed while rival Dell is up more than 21 percent.