Computers

A Sobering Quarter from Hewlett-Packard


It seems the tech industry isn't out of the woods yet. Computer industry giant Hewlett-Packard (HPQ) on May 19 reported that second-quarter earnings tumbled 17%. The company announced it would lay off 6,400, throwing cold water on pundits who had suggested industry sales were starting to stabilize.

Citing expectations of continued weakness, the company reiterated its cautious outlook for the remainder of the year. Palo Alto (Calif.)-based HP, which makes computers, printers, software, and other products, reported that earnings for the three months ended Apr. 30 fell to $1.7 billion, or 70¢ a share, from $2.1 billion, or 80¢ a share in the comparable period a year ago. Revenue slipped 3%, to $27.4 billion, from $28.3 billion.

The results matched Wall Street's earnings expectations of 86¢ a share on a non-GAAP basis and were a hair below revenue estimates of $27.5 billion. HP said earnings on a non-GAAP basis would have beaten analysts' expectations had it not taken a charge of 2¢ per share related to a patent dispute.

Hurd's Tepid Sales Forecast

Tech investors have been keen to hear from bellwethers HP, Cisco (CSCO), and Dell (DELL)—which reports its first-quarter earnings May 28—because their results include an extra few weeks of sales in April, offering a more current picture of demand.

But during a conference call with analysts, HP Chief Executive Mark Hurd issued a tepid forecast for sales through the remainder of the year. The disappointment was spread across a wide swath of HP's businesses, including servers, printers, and software, which could indicate tougher going for the computer industry than some analysts had foreseen.

Hurd said the company now expects revenue to fall 4% to 5% for the 2009 fiscal year that ends in October. It had previously forecast a 2% to 5% revenue decline. "CEOs have been giving marching orders to be very particular about new projects," he said.

Hurd's comments stand in contrast to rosier outlooks issued recently by his peers. Intel (INTC) CEO Paul Otellini said in April that the chipmaker expected to see sales in the current quarter return to normal patterns. Executives at Cisco and IBM (IBM) have suggested that the market drought may be coming to an end, particularly for corporate sales.

Slashing Expenses Beyond Payroll

Despite suggestions that corporate customers soon may begin buying equipment and software to satisfy pent-up demand, Hurd said: "It's probably not realistic" that sales will pick up significantly before the final three months of the year. Customers have continued to sit on the sidelines, even after Intel in this quarter introduced a new energy-sipping server chip that won widespread praise. Enticing financing offers on servers and software from HP and its rivals haven't managed to spur demand.

That HP still managed to match investors' profit and sales expectations was due in no small part to the company's ability to slash expenses to match weak demand. HP announced it will shed another 6,400 jobs in the next year across its business segments. Chief Financial Officer Cathie Lesjak did not elaborate on whether specific groups face more cuts.

HP has cut thousands of jobs made redundant as it integrates IT services company EDS, which it bought last August for $13.9 billion. And it has implemented across-the-board pay cuts and travel limitations. Hurd said that during the quarter, the company identified additional areas for expense reductions by combining offices for some employees and shedding real estate costs.

Bright Spots: China, U.S. Consumers

Investors sold HP's stock after the report. The company's shares were down nearly 2% in extended trading May 19 after closing the day at 36.58, up 85&cent, or 2.4%. The shares are little changed so far this year.

There were some bright spots in the quarter. HP experienced better-than-expected sales in China and more demand from U.S. consumers. But other segments of its business remained weak. "While we see at a macro level a couple of areas of encouraging signs…I'm not ready to call [the outlook] better," Hurd said. The company reiterated that it expects an adjusted profit of $3.76 to $3.88 per share for fiscal 2009.

With hardware sales continuing to show weakness, Hurd's decision to diversify into other areas such as software and services continues to pay off. HP's services business, bolstered by the EDS acquisition, saw revenues nearly double, to $8.5 billion.

But the gains were offset by double-digit losses in HP's other business segments. Server revenues fell 28%, to $3.5 billion; the PC group's sales fell 19%, to $8.2 billion; and the company's printing group experienced a 23% sales decline, to $5.9 billion. Software revenues fell 15%, to $880 million.

Edwards is a correspondent in BusinessWeek's Silicon Valley bureau.

Cliff_edwards
Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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