Technology

HP Reports Sharp Drop in Earnings


Hewlett-Packard's first-quarter earnings are off 13%, and the computer giant predicts the rest of the year will be just as rough

Amid a broad-based decline in its core personal computer and printer businesses, Hewlett-Packard (HPQ) on Feb. 18 reported that first-quarter earnings tumbled 13%, despite a slight 1% rise in revenue. The company predicted no quick rebound in its fortunes and cut its full-year earnings forecast.

Despite the weaker performance, the technology giant's broad portfolio of products and services and intense cost-cutting efforts appear to be helping it weather the global economic downturn better than most of its peers. "HP executed well in a challenging market," said Mark Hurd, HP chairman and chief executive officer.

Profit Margins Still Show Growth

HP appears to be benefitting from it early focus several years ago on trimming the fat across the company's expansive operations. Other tech companies are following suit. Chipmakers Intel (INTC) and Advanced Micro Devices (AMD) have been cutting costs and shedding factory capacity as sales of personal computers weaken sharply. Microsoft (MSFT), meanwhile, announced the first layoffs in its history, and Cisco Systems (CSCO) reported slow growth as orders for its products declined markedly. PC maker Dell (DELL) reports its earnings next week.

The Palo Alto (Calif.)-based HP, which makes computers, printers, software, and other products, reported net income for the three months ended Jan. 31 fell to $1.9 billion, or 75¢ a share, from $2.1 billion, or 80¢ a share a year ago. Revenue rose to $28.8 billion from $28.4 billion.

As part of a major cost-cutting effort Hurd told employees that the company would reduce base pay for execs and salaried workers. The company also is making changes to its 401K and share ownership plans.

Some analysts took solace from the fact that, in the face of the steep decline in sales and earnings and intense pressure to cut prices, HP still maintained or grew operating profit margins in most business segments. That suggests Hurd's heavy emphasis on cost-cutting and sharing of technology and software across the business groups continues to pay off. "The numbers show no one's immune to the current downturn," says Edward Jones technology analyst Bill Kreher, "But HP's strong focus on cost controls will help them emerge in a stronger position when demand recovers."

On a non-GAAP basis, the company met Wall Street expectations that it would earn 93¢ a share. HP's stock, which had been under pressure during trading on the Nasdaq, continued to retreat in after-hours trading. It was down about 6% from the market close, to 32.10 a share.

Revenue Declines Companywide

Most of the company's products and services groups posted double-digit sales declines as consumer and business demand dried up. The Personal Systems Group, which sells consumer and business computers and peripherals, saw revenues decline 19%, to $8.8 billion, with unit shipments down 4%. Notebook revenue for the quarter was down 13%, while desktop revenue declined 25%. Both were hurt by industry price-cutting to clear out retail inventories that piled up over the weak holiday selling period.

In the highly profitable Imaging & Printing Group, which sells printers and printer ink, revenue declined 19%, to $6.0 billion. The replacement ink business, which has been a bright spot for the company over the years, saw revenue slip 7%.

Despite the dramatic fall-offs, Hurd suggested the company continued to gain market share over competitors in most key segments. "This quarter, we effectively balanced expense management with share improvement," Hurd said in a conference call with analysts.

The company ended the quarter with $11.3 billion in cash on hand, and had cut two days worth of inventory off its balance sheet. Hurd said the company will ship less inventory in the second quarter to its retail and channel partners, particularly in the printer business, as it gears up for a prolonged downturn.

EDS Performance

The company's one bright spot was in services, where it benefited from its recent acquisition of EDS. The segment contributed more than a third of the company's profits during the quarter. Revenue increased 116%, to $8.7 billion. "We have seen a customer reaction [to EDS] that is just better than we expected," Hurd said.

Still, EDS dragged down the company's overall gross margins as its hardware support offerings for information technology typically deliver lower margins than higher-end services offered by rivals such as IBM (IBM), which also is relying on its strong software and services division to offset losses elsewhere. Currency fluctuations also dragged down earnings, HP executives said.

HP estimates full year 2009 revenue will decline approximately 2% to 5% from the prior-year period. The company expects 2009 earnings of between $3.19 a share to $3.31 a share. In providing guidance to investors and Wall Street analysts, the company was explicit in saying that it doesn't expect economic conditions to improve anytime soon: The forecast for the next quarter and the full fiscal year "assumes that first- quarter [fiscal year 2009] market conditions will persist," the company said.


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