HP profit slumps 13 pct on weak PC and ink sales

Wednesday, February 18, 2009
By JORDAN ROBERTSON, AP Technology Writer

SAN FRANCISCO —  Hewlett-Packard Co.'s quarterly profit dropped 13 percent, and sales ticked up just 1 percent, as even the technology company's cash-cow printer ink business was hobbled by the recession.

The world's top seller of personal computers also cut its 2009 guidance, but it was still in line with Wall Street's expectations.

HP shares fell $2.03, or 6 percent, to $32.05 in extended trading, after closing down 26 cents during the regular trading session, before the Palo Alto-based company reported its earnings.

Crippled technology spending undermined all but one of HP's major business lines, including PCs and servers. Only HP's services division, which bulked up with its $13.9 billion acquisition of Electronic Data Systems, saw an increase.

Services also have been strong for rival IBM Corp., since corporations are trying to save money by outsourcing some of their technology chores.

HP earned $1.85 billion, or 75 cents per share, in the three months that ended Jan. 31. That compares with profit of $2.13 billion, or 80 cents per share, a year ago.

Without one-time costs, HP earned 93 cents per share, matching analyst estimates.

HP's sales of $28.8 billion fell short of Wall Street's forecast by more than $3 billion, however. Analysts were expecting $31.9 billion in revenue. Without currency fluctuations, HP said its quarterly sales increased 4 percent over last year instead of the 1 percent rise with the currency fluctuations.

"Investors could be shaken by this report, and it could cause some of them to move to the sidelines," said Calyon Securities analyst Shebly Seyrafi. HP still gets "a relatively high percentage of its business from hardware, and that hardware side is going to be very vulnerable in this economic environment."

The pain of tighter budgets was felt across nearly all of HP's businesses.

Sales in the personal computer division fell 19 percent to $8.8 billion.

The printer and ink division, which contributes more than 40 percent of HP's operating profit, was also wounded, with sales falling 19 percent to $6 billion. That includes a 7 percent decline in supplies, a typically strong area that includes things like ink cartridges, which are among HP's biggest moneymakers.

But HP's services division more than doubled to $8.7 billion, mostly due to the addition of EDS. HP is cutting 24,600 jobs as part of that deal, and has already cut more than 9,000 of those positions.

Cathie Lesjak, HP's chief financial officer, said the decline in ink sales was a "reflection of a very tough economy _ in a tough economy folks don't print as much," a trend HP expects to continue and has baked into its 2009 guidance. HP is banking on the services business to pick up some of the slack.

"In the past, (the printer and ink) division has probably been the crown jewel of Hewlett-Packard, but today we've got another one, and that's services," she said in an interview. "It was the services resilience, and the profits that services generated in (the first quarter), that more than offset the declines in the hardware business."

HP predicted that it would earn between $3.76 and $3.88 per share in 2009, excluding one-time costs. Analysts polled by Thomson Reuters were expecting profit of $3.77 per share on that basis.

The financial crisis has mauled PC sales for all the big manufacturers, but HP managed to eke out some gains last year. HP owned nearly a fifth of the worldwide PC market in 2008, having expanded its lead over rivals Dell Inc., Acer Inc., Lenovo Group Ltd. and Toshiba Corp., according to the latest data from research firm IDC.

Jayson Noland, an analyst with Robert W. Baird & Co., said HP is "doing an admirable job of cost cutting in a tough environment."

"You have to give them credit for the bottom line, which has held up really well given the top-line numbers," he said.

HP revealed during a conference call with analysts that it is cutting employees' pay in a moneysaving move.

Chief Executive Mark Hurd's base pay will fall by 20 percent, other executives will see their pay decline by as much as 15 percent, while pay for other employees will decline by as much as 5 percent.

The company says employees will get the money back in the form of bonuses if HP performs well.

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