HP misses Q1 sales, revises 2011 downward

Apotheker's first Carly moment

Hewlett-Packard's new president and chief executive Leo Apotheker now knows what it is like to be Carly Fiorina, who ran the company two executives ago.

Not just because they held the same power at HP, but also because they missed their numbers soon after taking the reins. In the first quarter of fiscal 2011 ended January 31, HP posted revenues of $32.2bn, up 3.2 per cent, with net income of $2.61bn, up 15.8 per cent compared to the year ago quarter.

Speaking in a conference call with Wall Street analysts, Apotheker, who has just finished his first quarter on the job, said that HP's personal computer and services businesses did not meet anticipated top-line growth targets that the company had set. The PC business in China has had some issues in the past two quarters - which HP has not explained in any detail - but there seems to have been a more pronounced slowdown in PC purchases by consumers in the Americas region.

Because of the issues with PCs and short-term services contracts, Cathie Lesjak, HP's chief financial officer, said that HP had to chop $2bn out of the company's revenue guidance for the full 2011 year. HP now anticipates overall sales to be in the range of $130bn to $131.5bn. Lesjak said that HP was nonetheless raising guidance for non-GAAP earnings per share for the year, from $5.20 to $5.28, up somewhere between 14 and 15 per cent compared to fiscal 2010, which should placate HP shareholders some. That is with salary increases kicking in this year, too, by the way.

Lesjak added that HP now expected for sales in the second quarter to be between $31.4bn and $31.6bn.

"We have scrubbed these numbers long and hard and we think these are the right numbers," Apotheker promised Wall Street. Don't expect much kindness towards HP's shares tomorrow when the stock market opens.

As it does at the beginning of every financial year, HP recategorized its financials to reflect changes it has made in its business during the past year. With the 3Com acquisition done, networking is now part of the Enterprise Servers, Storage, and Networking division of its Enterprise Business. Some bits of services and software were moved around, too.

The ESSN division was a bright spot in fiscal Q1, with revenues up 22 per cent, to $5.63bn. Sales of Xeon and Opteron servers in the Industry Standard Servers unit were up 17 per cent, to $3.45bn, while Business Critical Systems (based on Intel's Itanium chips and supporting HP-UX, OpenVMS, and NonStop platforms from HP) were flat as a pancake with $555m in revenues.

Lesjak said that the new Superdome 2 blade-rack hybrid machines were "resonating well with customers" and that sales rose in the Americas for the BCS unit, just offsetting declines elsewhere. Disk and tape storage sales were a smidgen above $1bn in the quarter, up 14 per cent. Lesjak said that the integration of storage vendor 3Par - bought last year - was ahead of schedule, but did not say how much money that business added to the kitty in Q1. HP Networking accounted for $619m in revenues, nearly triple the level from a year ago thanks to the 3Com deal. Operating profit for the ESSN division was $828m during Q1.

HP's services business took it on the chin across the board in the quarter. Infrastructure technology outsourcing fell one per cent, to $3.64bn, and technology services fell by the same amount, to $2.6bn. The application services biz fell by three per cent, to $1.63bn, while business process outsourcing dropped 10 per cent, to $658m. (Most of that decline is due to the divestiture of the ExcellerateHRO business, and without that, BPO sales were only off two per cent.) HP Services had an operating profit of $1.6bn in the quarter, nearly twice that of its enterprise hardware business.

HP Software continues to be a lilliputian in the software world, and has gotten even smaller after the reclassifications - probably much to the chagrin of Apotheker, who is a software guy. Some business intelligence and analytics sales were moved from the software group to HP's Coporate Investments hodgepodge, where 3Com sat for the past year. After the rejiggering was done, the new HP Software group had sales of $657m, up five per cent, and posted an operating profit of $123m.

When you add it all up, HP's Enterprise Business had $14.9bn in revenues in Q1, a little less than half of the total haul for the company.

Personal Systems Group, which sells desktops, workstations, notebooks, and netbooks to consumers and businesses, had $10.5bn in sales in Q1, down one per cent from the year ago quarter. Notebook sales (which include netbooks) were off five per cent, to $5.81bn, even as unit shipments rose by four per cent. Desktop sales rose by a point to just under $4bn, and workstation revenues shot up 43 per cent in the quarter, but unfortunately only account for a small slice of sales, at $535m. HP said that combined desktop and workstation revenues rose five per cent, buoyed by a seven per cent increase in boxes going out the door. IPG had an operating profit of $672m in the quarter.

The problem in Q1 for HP's PC business was a consumer that is infatuated with tablets or not willing to spend money (or both). Consumer PC sales for HP dropped 12 per cent, while commercial PC sales rose 11 per cent. Apotheker said that we were in the "middle innings" of the corporate PC refresh cycle and that "this market still has some legs to it."

The Imaging and Printing Group, the bulwark for HP's profits historically, continued to chug along in Q1. Printing supplies (mostly ink but also paper and other related products) rose by seven per cent, to $4.36bn. Sales of printing and imaging hardware to companies was up a nice 13 per cent, to $1.46bn, while consumer product sales were off three per cent, to $808m. IPG overall had sales of $6.63bn, up seven per cent, and had an operating profit of $1.1bn. Yup, HP makes 45 per cent more profit from services than from printing, and it only takes 30 per cent more revenues to do the trick. That is why HP shelled out $13.9bn to buy EDS.

HP Financial Services, which does leasing and financing of gear for HP's customers, had revenues of $827m, up 15 per cent, and an operating profit of $79m. ®