Hewlett-Packard Co CEO Carly Fiorina is gambling that by ending development of her most expensive semiconductors, she'll save the world's No.2 computer maker as much as US$500 million a year.
Trouble is, her customers aren't buying machines with the Intel Corp chip she's betting on. Just 3,500 of the estimated 4.5 million servers shipped last year used Intel's Itanium processor, according to market researcher IDC.
HP has more riding on Itanium than any computer company. With profit margins narrowing for the past three years -- and analysts skeptical that today's earnings report will show a pickup in computer orders -- she says Itanium is key to reviving the money-losing server unit. Investors worry that her plan to use only Itanium chips in HP's most powerful machines will jeopardize sales should Intel stumble.
"Their destiny could be out of their control," said Chuck Jones, who helps manage US$8 billion at Stein Roe Investment Counsel LLC, which held 675,754 Hewlett-Packard shares as of December.
Analysts polled by Thomson First Call expect Hewlett-Packard to report a fiscal first-quarter profit of US$0.28 a share, excluding some costs, on sales of US$18.5 billion. Net income was 25 cents a share on sales of US$11.4 billion a year earlier, when Hewlett-Packard didn't own Compaq Computer Corp.
By 2006, Fiorina intends to base all HP's high-end servers on Itanium. She says the strategy will help the company compete in a more lucrative part of the server industry -- the market for machines that cost US$1 million or more and command profit margins of 35 percent to 40 percent. In comparison, margins on basic servers are about 10 percent, IDC says.
Fiorina has said HP will save US$400 million to US$500 million a year by eliminating the cost of developing and supporting its own chips.
"We are not going to out-invest Intel in the biggest bet it's making," Fiorina said, explaining her Itanium plans to executives at a Gartner Inc conference in Orlando, Florida in October.
So far, she's going it alone. International Business Machines Corp doesn't put Itanium in its most expensive machines. Dell Computer Corp, which buys all of its PC chips from Intel, doesn't sell Itanium servers. Sun Microsystems Inc. develops its own processors. Rivals say they don't want to entrust their entire lines to Intel, which was two years late with the first Itanium.
Hewlett-Packard shares have dropped 6.3 percent in the past year, compared with an 11 percent rise for Dell. The stock fell US$0.42 to US$17.75 at 4pm on the New York Stock Exchange yesterday.
HP has put almost a decade into Itanium. The Palo Alto, California-based company began joint development of the chip with Intel in 1994.
HP has said that chip didn't perform well enough to persuade customers to switch. Dell CEO Michael Dell said this month he hasn't seen demand for the processor; Sun CEO Scott McNealy calls the chip "Itanic."
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