Original URL: http://www.theregister.co.uk/2009/02/18/hp_q1_f2009_numbers/

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

EDS saves bacon

By Timothy Prickett Morgan

Posted in Financial News, 18th February 2009 23:30 GMT

Wall Street has been waiting on the edge of its window ledge seat to see how IT giant Hewlett-Packard performed during its first fiscal quarter of the year. And they can finally relax. HP reported sales of $28.8bn, up 1.2 per cent, and net earnings came in at $1.85bn, down 13.1 per cent compared to the year-ago quarter.

Just think of how ugly the financial report coming out of Hewlett-Packard this afternoon would have been had the company not acquired services rival Electronic Data Systems last year.

It would have been ugly indeed, with PC, server, and printer sales all declining in the double digits, and earnings from operations declining at even faster rates. It would have been a magnificent, Carly Fiorina-style swoon. Of course, given the economic climate, if EDS hadn't saved the quarter, you wouldn't see HP booting chairman and chief executive officer Mark Hurd. Who would replace him?

Who knows if the $13.9bn EDS acquisition will make sense over the long haul, but for a few quarters, HP will be able to use the combination to make it look like its business is more stable than other IT players. Which is why company mergers should require the merging of financials for the prior year - so you can make an honest assessment of how the business actually grew or didn't.

But this is the IT business, and we are looking for some good news. So let's get on with the bad news in HP's numbers, which will come as little surprise to anyone. With the economic meltdown spanning HP's Q1 and companies slamming the brakes on IT spending so hard they sprained their ankles - a few even put their feet through the floorboards - sharp declines in PC and server spending are no shocker.

HP's Personal Systems Group - which has been smacking Dell around for the past two years - took some punches from the much bigger global economy. (There's always something rougher and tougher than yourself). PSG's sales fell by 18.6 per cent in the quarter, to $8.79bn. Notebook sales fell by 13.4 per cent, to $4.91bn against unit shipment growth of 8 per cent, while desktop sales fell by 25 per cent to $3.3bn as units slammed down 15 per cent.

Workstation sales dropped by 27.9 per cent to $333m. Across all PC types, unit shipments fell by 4 per cent, so to say there was a magnificent drop in the average selling prices of PCs in the quarter is an understatement. It looks like customers that might have bought beefy desktops instead decided on cheap laptops. This accounts for PSG's earnings from operations falling by 30.7 per cent to $435m.

Over in the Enterprise Storage and Servers division - which is supposed to be a profit engine for HP but only sometimes pulls its own weight - sales were down 18.1 per cent to $3.95bn, and earnings from operations took a swan dive of 39.8 per cent to $405m. Within ESS, Industry Standard Servers (that's the ProLiant and BladeSystem brands) had sales of $2.32bn, down 22.3 per cent, while Business Critical Systems (which means Integrity and various legacy Unix and OpenVMS systems) slumped 16.6 per cent to $713m.

Itanium-based Integrity server sales fell by only 5 percent, accounting for all but $100m in BCS sales. Obviously, sales of Alpha and PA-RISC servers all but stopped. Cathie Lesjak, HP's chief financial officer, said that BladeSystem sales rose by 4 per cent in the quarter but that ISS and BCS both saw a shift in mix to cheaper products. In January, customers deferred spending on new iron. She added that HP thinks it gained three points of market share in the x64 server space in the fourth quarter of calendar 2008. HP's storage sales were not hit as hard as that for servers, storage sales still declined by 6.6 per cent to $913m.

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." ®