HP delivers first earnings report post-Fiorina

Hewlett-Packard posts sales slightly above analyst estimates, but interim CEO says company needs to improve bottom line.

Ina Fried Former Staff writer, CNET News
During her years at CNET News, Ina Fried changed beats several times, changed genders once, and covered both of the Pirates of Silicon Valley.
Ina Fried
5 min read
In its first earnings report since ousting CEO Carly Fiorina, Hewlett-Packard reported on Wednesday quarterly sales that narrowly topped analysts' expectations and profits that were essentially flat with last year.

The company said that for the three months ended Jan. 31, it earned $943 million, or 32 cents per share, on revenue of $21.5 billion. That compares with earnings of $936 million, or 30 cents per share, and revenue of $19.5 billion in the same quarter a year ago. Analysts were expecting the company to post earnings of 34 cents per share and revenue of $20.96 billion, according to Thomson First Call.

HP's quarterly results include a charge of 3 cents per share related to the company's $141 million settlement in a patent infringement case brought by Intergraph. Excluding that settlement and other charges, HP would have earned 37 cents per share.

The report comes roughly a week after Fiorina's forced resignation. HP said at the time that its earnings would be in line with prior expectations.

Interim CEO and longtime HP financial chief Robert Wayman said the company had "a solid first quarter," with strong revenue growth in services and improved sales and profits in its PC unit. However, he said HP's bottom line still needs improving.

"While we continue to make progress in growing our top line, there is work to be done to improve our profitability," Wayman said in a statement. "As the board conducts a CEO search, our management team is focused on driving improved execution to serve our customers, strengthen our competitiveness and improve shareholder value."

Part of HP's plan to improve profits is to continue to cut costs. The company had about $60 million in charges related to job cuts last quarter and expects about $140 million in layoff-related costs this quarter.

On a conference call with reporters, Wayman would not say how many jobs HP plans to cut or say whether HP would cut jobs beyond this quarter. At one point on the analyst conference call, though, HP said that the number of job cuts last quarter was more than one analyst's estimate of 600, with the bulk of cuts coming in the Technology Solutions Group that includes services, storage, servers and software. This quarter, about 60 percent of that unit's job losses will be in the services segment, said Ann Livermore, the executive vice president that heads the TSG division.

For the current quarter, HP said it expects revenue of $21.2 billion to $21.6 billion with earnings of 35 cents to 37 cents, not including an acquisition-related charge of 4 cents per share. The earnings forecast is similar to analyst predictions, while the revenue projection is slightly ahead of them. According to First Call, the average analyst estimate called for earnings of 36 cents per share on revenue of $21.1 billion.

HP's sales to Europe, the Middle East and Africa grew more than 12 percent, to $9.3 billion, and those in Asia grew 15 percent, to $3.3 billion. In the Americas, HP sales grew 6 percent, to $8.9 billion. HP benefited from a weak dollar. The company said that, adjusted for the decline of the dollar, its overall sales gain was 5 percent compared with last year.

As for the company's business units, the core imaging and printing business saw revenue rise 3 percent, to $6.1 billion, but operating profit dropped by $35 million, to $932 million.

On a conference call with analysts, printer and PC unit head Vyomesh Joshi said that the company's consumer hardware revenue was down 13 percent compared with last year.

"We are not satisfied with our consumer hardware this quarter, and we are going to take aggressive actions to ensure improvement in the next three to six months," Joshi said. HP plans pricing and marketing moves designed to recapture lost market share, a move Joshi acknowledged could hit profit margins.

In a follow-up call with reporters, Joshi downplayed the role that Dell is playing in the market, noting that their market share in single-function printers dropped in the fourth quarter.

"I don't think that Dell is a factor," Joshi said, adding that more pricing pressure was coming from traditional rivals Lexmark, Epson and Canon. However, Joshi noted that Dell has been giving away printers as part of PC packages.

The PC unit saw sales rise 11 percent, to $6.9 billion, while operating profit climbed by $86 million, to $147 million. "Our personal systems business is the healthiest it has been in many years," Joshi said. In January, HP combined its PC and printer units under Joshi, though it continues to break out results for each segment.

HP also saw its profitability in its server and storage segment drop, even as sales continued to rise. The company posted an operating profit of $71 million, down from $153 million in the year-ago quarter, while revenue rose 9 percent, to $4 billion. The company saw sales gains in its industry standard and HP-UX server sales, but it saw drops in its NonStop and AlphaServer product lines.

On the services side, HP grew revenue 20 percent, to a record $3.8 billion. However operating profit inched up only slightly, to $281 million, from $261 million a year ago.

HP's software business posted an 18 percent increase in revenue, to $240 million, though operating losses of $40 million were only slightly narrower than the $49 million loss in the year-ago quarter.

Sam Bhavnani, an analyst at market research firm Current Analysis, said that though HP's improvements in its PC business were noteworthy, the good news was offset by weak profit growth in several other areas, including HP's main profit engine--its printing business.

He said HP may face a tougher test this quarter as all its competitors will be seeking to exploit uncertainty over the CEO vacancy as well as the possibility the company might split itself.

"That's the message that IBM and Dell and Toshiba are going to use against the company," Bhavnani said.

One competitor isn't waiting. HP rival Sun Microsystems took out a full-page Wall Street Journal ad Wednesday offering an open letter to woo HP customers. Livermore told analysts she is not worried, noting that HP has its own program that has been targeting Sun customers for some time.

"We certainly feel our server line is in a much better position than theirs," Livermore said.