More Cracks In H-P's Armor (HPQ)

Hewlett-Packard Company (NYSE: HPQ) posted earnings of $0.93 EPS and $28.8 billion in revenue.  Thomson Reuters (First Call) estimates were $0.93 EPS and $31.93 billion in revenue.  While this is technically a “beat against earnings estimates” it does have many cracks showing here where we thought that the company was previously not being cautious enough.

As far as guidance the company put next quarter’s numbers at $0.84 to $0.86 EPS before one-time items ($0.70 to $0.72 net).  Revenue guidance was a $27.5 billion to $27.7 billion in revenues.  First Call has next quarter estimates at $0.89 EPS on $30.95 billion in revenue and fiscal October-2009 estimates at $3.77 EPS on $126.5 billion in revenues.

Here is where the issues come into play.  H-P had really been trying to hold the line on its forecasts.  The last quarter revenue was a mere 1% higher than a year ago and now the company is predicting a drop of 2% to 3% in the current quarter.  The company’s GAAP earnings are actually down over 5% in this last quarter as well.

We were always a bit more reserved in how the company could maintain its guidance and strength with what we have been seeing in both IT spending and in computer sales.  And now that concern looks like it is coming to reality.

If you look through the comments, the company better be glad its EDS  business plans “are ahead of plan.”  The PC business is being toppled by weak PC spending and probably by the waves of lower cost systems and netbooks.  H-P’s Personal Systems Group revenue was down 19% to $8.8 billion, with its unit shipments down 4%. Notebook revenue was down 13%, Desktop revenue fell 25%, commercial client revenue was down 19%, and its Consumer client revenue decreased 18%.  Those are all sharp numbers and fit in with the trends we have been seeing.  And it gets worse.  Imaging and Printing revenue fell 19% to $6.0 billion.  Printer unit shipments fell by a sharp 33%, with consumer printer hardware units down 31% and commercial printer hardware units down 39%.  It seems that even with new purchases in hardware that buyers aren’t upgrading the printers.

Enterprise Storage and Servers segments total revenue was $3.9 billion.  This is off by 18%. Storage revenue declined 7% with the midrange EVA products down 7%.  Industry Standard Server revenue was down 22% and Business Critical Systems revenue was down 17%.  There was one bit of growth in the ESS blabe segment with 4% growth.

The 116% services growth is due to the EDS acquisition, but revenue in technology services was flat.  HP Software revenue was down 7% to $878 million.

And now for what we find more interesting.  It almost feels as though H-P is financing its own customers more and more.  HP Financial Services reported revenue of $636 million, down 1% from year ago levels.  With the drop off seen in many units, this might be worth a note.  Financing volume increased 2%, and net portfolio assets declined 3%. Operating margin was 6.4% of revenue, which is lower than the 6.7% a year ago.

Shares closed down 0.75% at $34.08 today, and shares are down 3% at $33.05 in the after-hours reaction.  The 52-week trading range is $28.23 to $49.97.  There is one conclusion here.  H-P is far from immune to the woes of the world.

Jon C. Ogg
February 18, 2009