HP 3Q profit drops 19 percent as sales of PCs and printer ink remain weak

By Jordan Robertson, AP
Wednesday, August 19, 2009

HP 3Q profit drops 19 pct on weak PC, ink sales

SAN FRANCISCO — Hewlett-Packard Co.’s profit dropped 19 percent in the latest quarter, dragged down by ongoing weakness in sales of personal computers and printer ink.

The Palo Alto, Calif.-based company reported Tuesday that consumer spending on PCs is improving, and business in China was particularly good. Corporations are still being tightfisted, though.

Because of the recession, 2009 is shaping up to be the worst year in nearly a decade for the PC industry. HP, the world’s No. 1 PC maker, has been branching out into other areas, like technology services and computer networking, but the PC business still makes up nearly a third of its revenue.

Sales in HP’s PC business eroded 18 percent in the three months ended July 31, even as the number of units sold ticked up 2 percent. The discrepancy is explained by the fact PC makers have been slashing prices, a trend that has also hurt rivals. For instance, Wall Street projects a 23 percent sales drop at Dell Inc., the No. 2 PC maker, which will reports its latest quarterly numbers Aug. 27.

HP edged past Wall Street’s profit and sales forecasts, and issued better-than-expected profit guidance. But expectations had been high, with HP’s stock climbing about 75 percent since March.

Shares fell 96 cents, or 2.2 percent, to $43 in extended trading following the results. The stock had closed earlier Tuesday up 85 cents, or 2 percent, at $43.96.

HP reported after the market closed that it earned $1.64 billion, or 67 cents per share, in the fiscal third quarter. A year earlier the company made $2.03 billion, or 80 cents per share.

Excluding one-time items, HP earned 91 cents per share, a penny better than the average estimate of analysts polled by Thomson Reuters.

Sales fell 2 percent to $27.45 billion, slightly ahead of analysts’ projections for $27.26 billion. Sales would have risen 4 percent were it not for currency fluctuations.

Revenue from printing supplies was down 13 percent. One of those supplies — printer ink — has long been one of HP’s biggest moneymakers, but has been facing competition from generic, cheaper brands.

HP has been reluctant to call a bottom in the PC market, as chip maker Intel Corp. did in April — one of the first bullish signs about a turnaround in that sector. Cathie Lesjak, HP’s chief financial officer, said in an interview Tuesday that PC demand appears to have “stabilized.”

Lesjak said the decline in printing supplies revenue was mostly caused by currency fluctuations and changes in the way HP manages inventory at resellers. She said she expects the supplies business to improve over the next couple of quarters.

Analyst Rob Cihra with Caris & Company said despite management’s explanations of inventory adjustments, trends in HP’s core printing business “looked pretty underwhelming once again.”

HP is encroaching more onto rival IBM Corp.’s turf since last year’s $13.9 billion acquisition of Electronic Data Systems, a technology services company. IBM went through an aggressive transformation of its own over the past decade, shedding its PC and hard drive businesses as it tried to focus more on services and software.

Services are now HP’s biggest revenue and profit generators. The combined HP-EDS had $8.47 billion in services revenue in the latest quarter. It’s hard to compare that to last year, though, because the numbers HP has released don’t compare directly year-to-year. HP says that’s because EDS wasn’t a part of HP at this time last year, and the companies are still being integrated.

Aggressive cost-cutting has been a major help to HP’s finances and has been a hallmark of CEO Mark Hurd’s 4½ years at the company.

HP is cutting 24,600 jobs as part of the EDS acquisition and in May announced a separate round of 6,400 cuts involving workers from the product divisions. HP had about 320,000 workers before the layoff plans were announced.

Looking ahead, the company’s fiscal fourth-quarter profit outlook of $1.12 per share, excluding one-time items, is better than the $1.07 per share that analysts were expecting. Its forecast for revenue to rise about 8 percent quarter-over-quarter is in line with analyst estimates.

HP also reaffirmed its full-year 2009 revenue outlook.

The numbers were good and “the guidance is a relief. Their commentary though is what I would focus on: conditions are stabilizing, and some of the cyclical businesses should show a rebound next year,” said Jayson Noland, an analyst with Robert W. Baird & Co.

Still, there were “no big surprises, ho hum,” he added. “I don’t expect the stock to do much one way or the other. (The stock) has been very strong.”

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