HP's profit drops, more layoffs looming

May 20, 2009 10:12:08 AM PDT
As a gauge of how personal computer sales are faring, Hewlett-Packard Co.'s quarterly results clouded the issue rather than provided clarity. HP's profit dropped 17 percent to $1.72 billion and sales fell 3 percent to $27.4 billion in its fiscal second quarter, dragged down by lighter sales in two key areas -- PCs and printer ink.

The company also announced more layoffs: some 6,400 workers, or 2 percent of HP's global staff of 321,000, will lose their jobs over the next year as the company shrinks its product divisions. HP, whose products include PCs, printers, computer servers, ink and toner cartridges, didn't provide more detail on those cuts.

The layoffs come on top of the 24,600 jobs HP was already dumping as part of its acquisition of Electronic Data Systems, a technology services provider HP bought for $13.9 billion last year to mount a bigger challenge to IBM Corp.

HP's results did provide some insight into how the recession is affecting PC makers. A revealing thing happened to HP's PC business in the latest quarter: HP moved about as many PCs in the February-April period as it did in the same period last year, but pulled in far less money from those sales.

Revenue in HP's PC segment slumped 19 percent to $8.2 billion, even as HP stole market share and dethroned Dell Inc. as the top PC seller in the U.S.

The discrepancy points to a trend playing out across the industry: as retailers cut prices on PCs to lure shoppers, and consumers gravitate toward a new category of machines called "netbooks," which are mini-laptops that cost less and carry lower profit margins than regular laptops, PC makers are still moving units -- but fewer dollars are flowing back to them from those sales.

HP's numbers were also dampened by currency fluctuations and the stronger dollar, which makes deals done in other currencies worth less when they're converted into U.S. dollars.

A question lingering over HP's numbers -- and which will be scrutinized in Dell's results when it reports May 28 -- was whether PC sales are starting to bounce back from a miserable holiday season that marked their worst slump in six years.

HP executives wouldn't go that far. The company's chief financial officer, Cathie Lesjak, said in an interview that it's still "too tough to call" whether PC sales have hit a bottom.

That differs from what one of HP's major suppliers, Intel Corp., said last month. Intel Chief Executive Paul Otellini said PC sales had "bottomed out" during the first three months of the year and appeared to be returning to normal patterns.

HP is the world's No. 1 seller of PCs, while Intel is the world's biggest supplier of microprocessors, the calculating engines of PCs. Perhaps more telling is that the last quarter at HP ended April 30, so its analysis is based on more current information than Intel's. Dell is the world's No. 2 PC maker.

HP's stock fell on a less optimistic forecast than the company offered last quarter.

The profit forecast stayed the same: HP still expects $3.76 to $3.88 per share for fiscal 2009, stripping out one-time charges. But HP also indicated a sharper sales decline was in sight. After previously predicting that its full-year sales would decline 2 percent to 5 percent, HP narrowed that range Tuesday to 4 percent to 5 percent.

HP shares fell $1.83, or 5 percent, to $34.75 in extended trading Tuesday. Before the results were announced, HP closed regular trading up 85 cents, or 2.4 percent, at $36.58.

Shaw Wu, an analyst with Kaufman Bros., said the quarter was "quite good" considering the state of the economy but added the revenue outlook was a "little light." That was surprising because investors had higher hopes about HP's resiliency, driving up the stock price 40 percent since March.

"With the stock run-up, this is likely viewed as disappointing," Wu said. "But we believe HP is still positioned to weather the storm better than most."

HP earned $1.72 billion, or 70 cents per share, in the latest quarter. The per-share figure would have been 86 cents without restructuring and other one-time charges. Analysts were expecting a profit of 86 cents per share, but HP said it beat Wall Street's forecast because it included 2 cents per share of charges related to a patent dispute that analysts didn't factor into their estimates.

Sales matched analyst estimates. HP says sales would have been up 3 percent were it not for currency fluctuations.

Laptop revenue fell 13 percent to $4.7 billion. Desktop computer sales were down 24 percent to $3 billion. HP said some areas improved, particularly China and consumer sales in the U.S.

In HP's printer and printer-ink division, overall sales were down 23 percent to $5.9 billion. Within that, supplies revenue -- which includes ink -- fell 14 percent. Lesjak said the decline was only partially caused by weakened demand from users. A big reason for the decline was HP adjusting the amount of ink it had in resellers' inventory, she said.

The division for enterprise storage and servers, whose fortunes are tethered to fluctuations in spending by businesses, saw its sales fall 28 percent to $3.5 billion. Hardware sales are down across the industry because corporations aren't buying as many new computers or servers. Instead they're putting off orders or canceling them altogether.

Because of the EDS acquisition, services are now the biggest part of HP's business. Nearly a third of HP's overall revenue came from services in the latest period. HP had $8.5 billion in services revenue.

Services is also now HP's biggest moneymaker, eclipsing the printer and ink division that has long been HP's profit machine.

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