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HP Hardware Sales Fall, New Focus On Services

February 19, 2009

Hewlett-Packard Co. is profiting on its newly beefed-up services division to help pick up some of the slack in the sales of servers, personal computers and printer ink.

On Wednesday, HP said that its profit dropped 13 percent in the latest quarter dragged down by weakness in all major business lines except services, a division HP bulked up with its $13.9 billion acquisition of Electronic Data Systems last year.

Hewlett-Packard’s net income was at $1.85 billion in the first quarter this year, compared to $2.13 billion last year.  HP earned 93 cents a share, which was in line with analyst estimates.

HP said its sales rose 4 percent without currency fluctuations.  The sales went up to $28.8 billion, which is over $3 billion short of the average estimate of analysts polled by Thomson Reuters.

These numbers show trouble that resembles what most technology hardware companies are having as budgets tighten.  IBM Corp., the rival to HP, has posted strong numbers, and also been hit by slumping hardware sales.  Corporations are putting off buying expensive new pieces of machinery, while they keep paying to outsource their technology chores as a way to save money down the road.

Things are not expected to improve soon.

HP is the world’s top seller of personal computers.  The company cut its 2009 guidance, but was still in line with Wall Street’s expectations.

Their shares fell $1.94 to $32.14 in extended trading.  They closed down 26 cents during the regular trading season, which was before the Palo Alto-based company reported its earnings.

“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.”

Tighter budgets were pushed across nearly all of HP’s business.

The personal computer division’s sales fell to $8.8 billion.

HP’s printer and ink division, which contributes to over 40 percent of their operating profit, was hurting with sales dropping to $6 billion.  That included a decline of 7 percent in supplies, which is typically a strong area that includes things like ink cartridges, which are a top HP’s biggest profit makers.

HP is up against generic ink makers, who has cheaper ink and is gaining on the industry due to the economy, and a trend among some businesses and consumers to print less as a way to save money.

A bright spot for HP is its services division.  This division has sales that have doubled to $8.7 billion, due to the addition of EDS.  HP is cutting 24,600 jobs as part of that deal, and has already cut over 9,000 of those positions.

HP’s chief financial officer, Cathie Lesjak, said the decline in ink sales was a “reflection of a very tough economy, when consumers do not print as much,” a trend HP predicts to continue and has baked into its 2009 guidance.

“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 predicts to earn between $3.76 and $3.88 per share in the 2009 season, excluding one-time costs.  Analysts, polled by Thomson Reuters, expect profits of $3.77 per share on that basis.

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

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.

Mark Hurd, HP’s chief executive, spent nearly four years at HP relentlessly cutting costs, sometimes in the form of big job cuts.  The first big act at HP by Hurd was a major restructuring that eliminated nearly 15,000 jobs.

HP showed during a conference call with analysts that Hurd and other employees will have their pay cut for a bid to save the company money.

The chief executive’s base pay will drop 20 percent, while executives will see their pay decline by as much as 15 percent and pay for other employees will decline by as much as 5 percent.

Employees will get the money back in the form of bonuses if HP performs well.

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