HP Meets Expectations Thanks to Services

HP Earnings and EDS

Hewlett-Packard today posted quarterly results in-line with expectations, thanks to strength in its services business.

For its second fiscal quarter ended April 30, HP (NYSE: HPQ) reported income of $2.1 billion before charges, or $0.86 per share — meeting Wall Street consensus, according to Reuters Estimates. Revenue totaled $27.4 billion, just shy of analyst estimates of $27.5 billion, however.

Those figures represent an expected dip in HP’s business: Net income declined 3 percent compared with the same quarter a year earlier, while income was off 6 percent year-over-year.

The results excluded $382 million in charges relating chiefly to HP’s acquisition of EDS. After the charges, HP’s income dipped to $1.7 billion, or $0.70 per share.

EDS helped propel HP’s services revenue up 99 percent year-over-year to $8.5 billion, and HP said the EDS integration is coming along smoothly.

“The integration of EDS is going well,” said Mark Hurd, HP’s chairman and CEO, on a conference call to discuss the numbers. “The pipeline has grown by double digits, customer satisfaction gone up. We’ve removed half of the 25,000 headcount as planned. Despite our progress, the vast majority of EDS’s savings is ahead of them.”

Hurd also disclosed that another 6,400 jobs, two percent of HP’s total workforce, would lose their jobs over the coming year.

It’s a good thing the services business was so strong, because HP otherwise would have been in severe trouble: Its hardware and software businesses were down by double-digits across the board.

HP’s Enterprise Storage and Servers (ESS) group took the hardest hit, with a year-over-year revenue decline of 28 percent. All segments reported declines, with blade servers making the best showing at only a 12 percent decline.

HP Software revenue declined 15 percent, HP’s PC group posted flat unit shipments but revenue declined 19 percent, and the company’s Imaging and Printing Group (IPG) revenue declined 23 percent. HP Financial Services (HPFS) also reported a 6 percent decline in revenue.

CFO Cathie Lesjak said that inventory reductions were made across the board, particularly in the Imaging and Printing Group, and now it would be a matter of tuning inventories for specific areas.

HP ended the quarter with $13 billion in cash and debt reduced by $1.5 billion. When all the cutting is done from EDS, total savings will amount to $3 billion, Lesjak said.

While HP receives most of its revenue from outside of the United States — accounting for 64 percent of total revenue — the Americas represented the company’s strongest market during the quarter.

Revenue grew 9 percent in the Americas, while it declined 10 percent in Asia-Pacific and 11 percent across Europe, the Middle East and Africa (EMEA).

Currency rates had an impact on HP’s revenue, as it did to IBM earlier this quarter. When adjusted for the effects of currency, Americas revenue grew 12 percent, EMEA declined only 2 percent and the Asia-Pacific region was down 5 percent.

Looking ahead

HP expects third-quarter revenue for this year to be approximately flat to down 2 percent sequentially. Earnings before charges is expected to be approximately $0.88 to $0.90 per share, the company said, with revenue for the full fiscal year declining approximately 4 to 5 percent from last year.

Hurd said there would be continued realignment of inventory, especially in IPG.

[cob:Special_Report]”Some places, we did a good job in managing the inventory. But there are some places where we’d like to align the mix of hardware within the context of channel inventory and demand,” he said.

HP also expects to try and grab more market share in the third quarter, especially in the PSG area.

“We actually had some outages of product,” he said, but later added, “We’re not forecasting a significant change in behavior because we want to see more data to indicate a change in demand from the market.”

Right now, he said, customers are just buying what they have to buy to get the job done and have told him they are delaying purchases for as long as they can.

Hurd never addressed the rumored October release of Windows 7 directly and how it might impact purchasing decisions, but he did discuss customer buying patterns. Since fiscal budgeting is done in the September/October period the year prior, “any material catalyst change to the ’09 trajectory is unrealistic.”

He said the time to check on any potential impacts is when budget planning starts in August or September of this year.

Update adds comments from the conference call with analysts.

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