EDS slows HP profit decline

HP doesn't expect the economy to improve soon, but does think demand for its services will remain strong as the company posts declines in all groups but EDS.


EDS slows HP profit declines in all groups but EDS
By Nancy Gohring, IDG News Service

Hewlett-Packard has cut its forecast for sales and profits as it announced first quarter figures which showed sales up just 1 percent at $28.8 billion, against a $32 billion target.

Profit was 1 percent down, year-on-year at $1.9 billion, and without strong growth in its Services group, HP would have fared much worse. Revenue for that group grew 116 per cent to $8.7 billion, primarily due to HP's acquisition of EDS.

The Services group accounted for about one-third of the company's profit, said Cathie Lesjak, HP's CFO, during a conference call to discuss the earnings.

HP is progressing ahead of schedule with its EDS integration plan and by the end of the first quarter had cut 9,000 of the nearly 25,000 jobs that it expected to cut as part of the deal, said Mark Hurd, chairman and CEO at HP.

Even though HP doesn't expect the economy to improve soon, it does think demand for its services will remain strong.

"In many cases, the services market sometimes moves counter-cyclical to the economy," Hurd said. That's because while companies struggle, they sometimes turn to services as a way to save costs in the short term.

Another misfortune may also be helping HP. The problems at Satyam, the IT services company whose founder and other leading executives resigned recently after admitting to inflating profits, have perhaps created some more interest in HP's service offerings, Hurd said.

Revenue from HP's Personal Systems Group, which includes computers, declined 19 per cent compared to the previous year to $8.8 billion.

Unit shipments were down 4 per cent. Desktop revenue plummeted 25 per cent while notebook revenue declined 13 per cent.

Its Enterprise Storage and Servers group reported revenue down 18 per cent to $3.9 billion compared to the same period a year earlier.

Some companies may have bought a lower-level, less expensive server while in the past they would have bought a higher-end server, Hurd said. "People are trying to buy as little as they can buy in the context of getting what needs to get done," he said.

But companies also are putting off buying decisions, and that will probably create opportunities in the future, Hurd said. He hopes to position HP to take advantage of a potential future boom in pent-up buying.

The Imaging and Printing Group also declined, with revenue down 19 per cent to $6.0 billion. Within that group, printer unit shipments decreased 33 per cent as people put off buying new printers, Hurd said. Sales of printer supplies were down too. "When you don't have a job, you aren't printing as much," he said.

HP Software revenue was down 7 per cent to $878 million and HP Financial Services revenue decreased 1 per cent to $636 million.

The company has further ideas for cutting costs as the economy continues to struggle. It has significantly reduced travel expenses and is reducing employee base pay and benefits, Lesjak said.

The results were lower than HP said it expected when it reported its previous quarter earnings in November.

At that time, it said revenue for the quarter ending in January should reach between $32 billion and $32.5 billion, with earnings per share in the range of $0.80 to $0.82.

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