HP Sees Sharp Drop in Revenue, No Relief in ’09

Hewlett-Packard on Wednesday reported that fiscal first quarter profit fell 13 percent and sales rose just one percent as sales fell across nearly every business unit. Only its services division, buoyed by the addition of Electronic Data Systems (EDS), saw a sales increase.

The problems were across the board and numerous, reflecting not just weakness in the U.S. but globally. Revenue would have been up four percent, instead of one percent, were it not for currency adjustments.

For its fiscal first quarter ended January 31, HP (NYSE: HPQ) saw revenue rise one percent, to $1.85 billion, or 75 cents a share, from $2.13 billion, or 80 cents a share from a year ago. Excluding one-time charges, HP earned 93 cents a share, matching average analyst estimates from Reuters.

Revenue for the quarter was $28.8 billion, well below the $31.9 billion Wall Street estimate, but up one percent from the $28.5 billion in the first quarter of 2008. The Image and Printing Group was down 19 percent, the Personal Systems Group was also down 19 percent, Enterprise storage and Servers fell 18 percent, software was off seven percent and HP Financial slipped just one percent.

Services was the one bright spot, up 116 percent, thanks to the $13.9 billion purchase of EDS last year. That’s paying off, with HP services now account for $8.75 billion in revenue and $1.1 billion in operating profit.

HP CEO Mark Hurd announced plans in September to cut 24,600 workers, or 7.5 percent of the combined Hewlett-Packard and EDS staff, over the next three years.

Looking out onto the rocky landscape of 2009, HP expects a second quarter profit of 84 cents to 86 cents per share, excluding one-time charges. Analysts project profit of 89 cents per share, according to Reuters.

Cathie Lesjak, executive vice president and chief financial officer for HP, said on a conference call with analysts that the company is assuming the market conditions from Q1 will persist into Q2. She added that weaknesses in foreign currency will have a negative seven to eight percent impact on Q2 and fiscal 2009 revenue.

HP expects to report a profit of $3.76 to $3.88 per share for the full year, excluding one-time charges. That’s a decline from the company’s previously forecast of $3.88 to $4.03 per share.

Update on EDS integration

Hurd, on the call with Lesjak, said that EDS integration is ahead of schedule and there is progress in integrating the two firms. About 9,000 of the 24,000 job eliminations have taken place and Hurd said HP is “on plan to achieve cost synergies outlined in September.”

The company is already seeing benefits of the acquisition, including landing large contracts with two Fortune 100 firms, said Hurd.

Customer reaction to the EDS merger “is just better than we expected,” said Hurd. Because services tends to move counter-cyclical to the economy, EDS is garnering even more business than it would normally. It’s giving HP the rare luxury of being choosy.

“What we have to do is make sure we’re very discretionary about the deals we go pursue,” Hurd said in the conference call. “We just need to make sure we’re doing the right thing and making sure we’re going for the right deals. We have more work than we know what to do with.”

HP will work to take more cost out of the company in 2009 than in the past, but Hurd is being cautious. “This is not a one-trick thing. I’m not a big believer in taking out short term take-outs that you have to put back in two or three quarters from now,” he said. Engineering headcount is actually up for the quarter, he noted.

The real weakness is in consumer segments like PCs and printing supplies. Lesjak thinks that will take longer to recover and coming quarters might be even worse than the seven percent decline in Q1. “That won’t turn around until the economy starts to rebound. Then we get back to a market that grows in the mid-single digits,” said Lesjak.

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