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HP printer, server, and PC sales in double digit dip

EDS saves bacon

The Rise of the Services

HP Services is now rivaling the PC business as the largest part of the company, with sales up 116 per cent to $8.74bn, and thanks to the addition to EDS, the HP Services division delivered $1.12bn in earnings from operations. Hurd said that services now delivers about a third of net income at HP and that the EDS integration is ahead of schedule. That said, Lesjak said that if you looked at EDS as a separate unit, sales were down 15 per cent, with half of that coming from real demand slackening and half coming from the strengthening dollar against foreign currencies, particularly the British pound.

Despite all that, Hurd was pretty ebullient about services. "We have to be very disciplined about the deals we do," he said. "But the funnel is strong." He said that the scandal over at Indian services provider Satyam is also helping HP Services and that the services business in general tends to be counter-cyclical, meaning that when times get tough, people thing about outsourcing and other kinds of services to reduce costs or capital outlays or both.

HP Software had sales of 878m, down 7 per cent, and when you add ESS, Services, and Software together, you get the Technology Solutions Group, which had $13.6bn in sales, up 38.2 per cent thanks largely to EDS.

The Imaging and Printing Group - which is the traditional profit engine at HP - had a sales decline of 18.7 per cent in fiscal Q1 to just under $6bn. Printer shipments declined 33 per cent in the quarter, which is something that HP had been expecting given the economy, and supplies sales (where the real money is at, as you well know) fell by only 7 per cent. Supplies accounted for 68 per cent of IPG sales in the quarter (about $4.06bn), and earnings for operations for IPG came to $1.1bn, down only 3.2 per cent.

HP Financial Services - which does equipment financing for customers and resellers - is accounted for separately from HP Services and did pretty well, with revenues down 1 per cent to $636m

On a geographical basis, HP's sales grew to $12.4bn in the quarter in the Americas region, up 11 per cent, by EMEA came in at $12bn, down 3 per cent, and Asia/Pacific hit $4.4bn, down 11 per cent. In the ever-popular BRIC countries - Brazil, Russia, India, and China - sales feel by 22 per cent compared to Q1 in fiscal 2008.

Looking ahead to the rest of fiscal 2009, Lesjak said that roughly a third of HP's sales - some services, financing, supplies, and so forth - and half of the company's net income now comes from a recurring revenue stream, which makes it easier to project earnings even if you can't precisely peg revenues. To that end, HP is estimating that fiscal second quarter revenues would decline by about 2 to 3 per cent (including the effect of adding in EDS sales), with earnings per share of 70 to 72 cents.</p.

That means more of the same that HP saw in fiscal Q1. Ditto for all of fiscal 2009, where HP is projecting sales will be down 2 to 5 per cent compared to fiscal 2008, and EPS will come in at between $3.19 to $3.31. By the math of Ben Reitzes of Barclays Capital, somewhere around $13bn in sales that HP was projecting for fiscal 2009 has evaporated thanks to the economic meltdown.

And Hurd isn't looking back because you can't count that kind of money. "We don't want to bank on the fact that the economy will get better," Hurd explained on the conference call with Wall Street analysts. "I hope it is better in Q2, Q3, and Q4. But that is not how we are modeling." ®

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