With sales of servers and personal computers and even printer ink taking a drubbing because of the recession, Hewlett-Packard Co. is banking on its newly beefed-up services division to help pick up some of the slack.
HP said Wednesday that its profit dropped 13 percent in the latest quarter, dragged down by weakness in all major business lines except services, a division HP bulked up with its $13.9 billion acquisition of Electronic Data Systems last year.
HP's net income was $1.85 billion, or 75 cents per share, in the quarter that ended Jan. 31, versus $2.13 billion, or 80 cents per share, a year ago. Excluding one-time costs, HP earned 93 cents per share, which was in line with analyst estimates.
Sales ticked up just 1 percent to $28.8 billion, more than $3 billion short of the average estimate of analysts polled by Thomson Reuters. HP said its sales rose 4 percent without currency fluctuations.
The numbers point to troubles most technology hardware companies are having as budgets tighten. HP rival IBM Corp., whose services division has also posted strong numbers, has also been hit by slumping hardware sales. While corporations are putting off buying expensive new pieces of machinery, they keep paying to outsource their technology chores as a way to save money down the road.
Things aren't expected to improve soon.
HP, the world's top seller of personal computers, also cut its 2009 guidance, but it was still in line with Wall Street's expectations. Its shares fell $1.94, or 5.7 percent, to $32.14 in extended trading. They had closed down 26 cents during the regular trading session, before the Palo Alto-based company reported its earnings.
"Investors could be shaken by this report, and it could cause some of them to move to the sidelines," said Calyon Securities analyst Shebly Seyrafi. HP still gets "a relatively high percentage of its business from hardware, and that hardware side is going to be very vulnerable in this economic environment."
The pain of tighter budgets was felt across nearly all of HP's businesses. Sales in the personal computer division fell 19 percent to $8.8 billion.
The printer and ink division, which contributes more than 40 percent of HP's operating profit, was also wounded, with sales falling 19 percent to $6 billion. That includes a 7 percent decline in supplies, a typically strong area that includes things like ink cartridges, which are among HP's biggest moneymakers.
HP is fighting generic ink makers, whose cheaper ink has become more popular as the economy has faltered, and a trend among some businesses and consumers to print less as a way to save money.
One bright spot for HP was its services division, whose sales more than doubled to $8.7 billion, mostly due to the addition of EDS. HP is cutting 24,600 jobs as part of that deal, and has already cut more than 9,000 of those positions.
Cathie Lesjak, HP's chief financial officer, said the decline in ink sales was a "reflection of a very tough economy — in a tough economy folks don't print as much," a trend HP expects to continue and has baked into its 2009 guidance.
"In the past, (the printer and ink) division has probably been the crown jewel of Hewlett-Packard, but today we've got another one, and that's services," she said in an interview. "It was the services resilience, and the profits that services generated in (the first quarter), that more than offset the declines in the hardware business."
HP predicted that it would earn between $3.76 and $3.88 per share in 2009, excluding one-time costs. Analysts polled by Thomson Reuters were expecting profit of $3.77 per share on that basis.
The financial crisis has mauled PC sales for all the big manufacturers, but HP managed to eke out some gains last year. HP owned nearly a fifth of the worldwide PC market in 2008, having expanded its lead over rivals Dell Inc., Acer Inc., Lenovo Group Ltd. and Toshiba Corp., according to the latest data from research firm IDC.
Jayson Noland, an analyst with Robert W. Baird & Co., said HP is "doing an admirable job of cost cutting in a tough environment." "You have to give them credit for the bottom line, which has held up really well given the top-line numbers," he said.
HP's chief executive, Mark Hurd, has spent his nearly four years at HP relentlessly cutting costs, sometimes in the form of big job cuts. Hurd's first big act at HP was a major restructuring that eliminated nearly 15,000 jobs.
HP revealed during a conference call with analysts that Hurd and other employees will have their pay cut in a bid to save the company money.
Hurd's base pay will fall by 20 percent, other executives will see their pay decline by as much as 15 percent, while pay for other employees will decline by as much as 5 percent. The company says employees will get the money back in the form of bonuses if HP performs well.