HP reveals its vulnerability with 13% profit drop

The financial results published by Microsoft in January 2009 proved once and for all that not even the IT industry’s star performers were immune from the impact of the credit crunch.

In February, another company, whose runaway success has often buoyed the IT industry, followed the downward trend of the world’s economy.

Hewlett-Packard saw revenues grow by just 1% during the first quarter of its financial year, ending 31 January 2009, to $28.8 billion, although when measured in local currencies, that growth amounted to 4%.

At the same time, the company’s profits shrunk by 13% during the quarter, from $2.1 billion last year to $1.9 billion. High revenue growth of 11% in the Americas region to $12.4 billion was offset by a 3% fall in sales in Europe, Middle East and Africa, down to $12 billion, and an 11% drop to $4.4 billion in Asia-Pacific. Much of the US growth came from the addition of revenues from HP’s acquisition EDS.

HP’s sharp decline in earnings is testament to the company’s dependency on its printer and ink division. Revenues for the unit, which normally contributes around 40% of HP’s profit, fell by 19% to $6 billion. Worse, printer hardware unit sales tumbled 33%, a slump that will have a knock-on effect on cartridge sales.

The company was also blighted by a worldwide decline in PC shipments, already seen in Microsoft’s numbers. PC revenues fell by 19% to $8.8 billion during the quarter. But unlike Microsoft last month, HP did not attribute this drop to the growing popularity of ‘netbooks’.

The services “division doubled revenues to $8.7 billion, thanks to last year’s” acquisition of EDS.

Indeed, if it had not been for the inclusion of EDS’s revenues into this quarter’s numbers, HP’s growth would have been deeply negative: down by around 13%. The company revealed that it has already cut 9,000 of the 24,600 jobs it plans to axe following the acquisition, plans against which HP/EDS employees protested earlier in the month.

“In the past, the printer and ink division has probably been the crown jewel of HP, but today we’ve got another one, and that’s services,” HP CFO Cathie Lesjak told Associated Press.

HP predicted a revenue decline of between 2% and 3% in the coming year. It also announced a wide-ranging round of pay cuts – causing yet more consternation among its workforce.

While HP’s success in recent years has been at the expense of rival computer maker DELL, the reverse was not true in the most recent quarter. Dell published financial results that reveal how hard the recession is hitting the hardware sector.

Revenues for its financial quarter ending 31 January 2009 were $13.4 billion, down 16% compared with the same period last year, with net income down 48% to $351 million.

The recession has caused businesses and consumers to defer IT spending until the future is more certain, CEO and chairman Michael Dell said. The company’s only option is to intensify its cost-cutting initiatives, he added. Dell expanded its prior commitment to cut operational costs from $3 billion to $4 billion.

“The cost actions we took this past year made us more competitive and delivered value to customers in a challenging economic environment,” CFO Brian Gladden said, despite the evidence to the contrary. In the closing quarter of 2008, Dell’s global PC market share was down 0.3% to 17.9% during the quarter, according to Gartner.

Testing innovation

The increased pressure on IT costs caused by the recession is expected by many observers to revolutionise the way businesses consume IT.

Open source software, for example, is expected to extend its reach during the downturn.

However, the recent financial performance of Novell, the systems management software provider that sells support and services around the Linux operating system, does not wholly support that view. The company’s first quarter revenues dropped by 7% to $215 million, thanks to falling subscription and services sales. Net income fell too, down 36.5% to $10.7 million.

And even though Novell’s open source business division actually grew sales by 19% to $37.1 million, the company’s forward-looking numbers suggest less positive news in coming quarters.

The poster child of a different innovation, ondemand CRM provider Salesforce.com fared a lot better, crossing the $1 billion threshold by generating revenues of $1.08 billion in its last financial year. That represents a 44% increase on the previous year, and a significant milestone in the story of software-as-a-service (SaaS).

The company withstood the economic calamity of the tail end of 2008 well – revenues for its final quarter of the financial year, ending 31 January 2009, were $290 million, up 34% from the same quarter the previous year.

However, the company does anticipate some impairment as a result of the recession, and downgraded its predicted revenues for the coming year from around $1.55 billion to around $1.33 billion. “There’s increasing uncertainty out there,” CFO Graham Smith told investment analysts.

Profitability is on the rise at Salesforce.com though. Net income for the most recent quarter was $13.8 million, nearly twice the figure earned in the last quarter of the previous year.

At 1.3%, that remains a tiny net margin by software industry standards, and is unlikely to thrill investors. But they are tracking a company which is content to sacrifice profitability to maintain a low per-seat price for its SaaS offering – at least until it has built the vast franchise it plans for its service.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

Related Topics