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HP: Hey, it could easily have been so much worse

'Turnaround won't be linear' - did I really say that?

If you were expecting HP to bring good news to the IT industry when it reported its financial results for the fiscal second quarter, you are no doubt sorely disappointed. Well, unless you consider that in terms of profit declines it could have been a lot worse.

In the quarter ended April 30, HP was down on all fronts, and CEO Meg Whitman blamed the company's own execution, various industry transitions away from the kinds of machines HP made dough on five and ten years ago, softness in various economies (particularly Europe), and intense competition (particularly in servers and PCs). HP's revenues were off 10.1 per cent to $27.58bn, operating earnings were down 15.2 per cent to $2.66bn, and net income was down 32.4 per cent to $1.08bn.

It is no accident or random coincidence that arch-rival Dell has been very aggressive in the most recent quarter, slashing PC prices to eat market share and, as it turns out, decimating its profits for its own quarter ended on May 3. Dell's revenues dropped 2 points to $14.1bn in its last quarter, but net income was down 79 per cent to a mere $130m.

Whitman said as much on the call with Wall Street analysts to go over the numbers for fiscal Q2, saying that Dell had "cratered" its earnings to grow market share. "Maybe that is what you do if you are trying to go private," quipped Whitman, and more than a few of us are thinking the same thing, but this is not what a responsible public company does according to Big Meg.

But if you want to be really honest about it, both Dell and HP are in a fight for business in a tough economic environment where there is a lot of competition in the markets where both companies play. It is not easy to wring profits out of x86 servers any more – well, unless you are Intel and Microsoft, and at least for a little while longer.

HP's PC business was down 20 per cent in the quarter, to $7.58bn, and operating income for the Personal Systems group was nearly cut in half to $239m. Total PC units were down 21 per cent, with notebook units and sales both off 24 per cent from the year-ago period and desktop revenues down 19 per cent with an 18 point drop in shipments.

Even with all that decline, Cathie Lesjak, HP's CFO, said on the call that the company believed it held PC market share and made gains in China and India, fast-growing markets for PCs these days and places where HP and Dell have both struggled against the local competition. HP pushed $3.72bn in notebooks, $3.1bn in desktops, and $521m in workstations (down 3 per cent).

Lesjak said that the decline in the notebook business was steeper than the company expected, as was the slowdown in business in general in the EMEA region, which was down 9 per cent year-on-year. Sales in the Americas region was off 10 per cent, and the Asia/Pacific region was down 12 per cent.

The Enterprise Group, which makes and sells servers, storage, networking gear, and systems software as well as support services for all those wares, fell 9.6 per cent to $6.82bn in sales. Operating income for Enterprise Group was hit even harder, down 20 per cent to $1.08bn.

HP continues to be adversely impacted by the decline in Itanium-based Integrity and Superdome 2 server sales, which fell 37 per cent in the quarter to a mere $266m. Industry Standard Servers – that means ProLiant rack, tower, and blade servers and the BladeSystem, SL6500, and now Moonshot enclosures – took a 12 per cent revenue hit to $2.81bn.

Storage arrays as a group, including disk, flash, and tape products, fell by 13 per cent, to $857m, and networking products were a relative bright spot with sales up 1 per cent to $618m. Technology Services, the break-fix biz for this gear, slid by 3 points to $2.72bn.

Whitman said that HP fell short in the selling effort for both mainstream servers and special boxes sold to hyperscale data centers. "We simply have to execute better, and we are on it," she said.

Lesjak said there were server deals that HP walked away from because there weren't any profits in them, and added that HP was not interested as much in doing one-shot deals with no margin as it was becoming a strategic partner with customers who buy a bunch of iron as well other services. And in those cases, HP would be more willing to give on price.

The Printing Group was a bright spot on the profit front, with operating earnings of $958m, up 18.6 per cent against a revenue decrease of eight-tenths of a point to $6.08bn. Ink saved HP's cookies once again, with supplies up 1.5 per cent to $4.12bn. Printing hardware sold to businesses brought in another $1.4bn (down 5.5 per cent) and consumer printing gear brought in another $561m (down 5.4 per cent).

Enterprise Services had an 8 per cent revenue decline in the second fiscal quarter, to just a hair under $6bn, with infrastructure outsourcing falling 6 per cent to $3.72bn and application and business services falling 10 per cent to $2.28bn.

Among other things, HP is wrestling with the transition from server hosting to clouds and from application hosting to SaaS, and both, said Whitman, are putting pressure on services. Whitman also said that HP was planning on making some cloud announcements in June at its Discover extravaganza with partners and customers.

HP Financial Services, which provides financing for HP's wares, had $881m in sales, down 9 per cent, and is separate from the Enterprise Services group.

As for the seemingly continuous restructurings that HP has endured – like other IT rivals, who always seem to be acquiring, firing, and hiring – Whitman once again asked Wall Street to be patient.

"Our progress in this turnaround is not going to be linear," she said. "We are fixing a lot of the impediments to making HP great. I will say that this takes time, is global in nature, with 180,000 partners that we need to bring along."

To that end, she said that HP had rejiggered its deals with partners on May 1, and the effects of those changes, which she did not elaborate on, would be felt in the remaining two quarters of fiscal 2013 and into fiscal 2014.

HP did not provide revenue guidance for the remainder of the year, but did say it hoped to bring 56 to 59 cents per share to the bottom line in fiscal Q3 and $2.50 to $2.60 per share for all of fiscal 2013. ®

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