HP earnings dip nearly 10%, will cut salaries

Updated at 3:15 p.m. PST with details from the conference call.

Hewlett-Packard is facing the reality of the recession, and finally slipped up on its earnings.

For the fiscal first quarter, the PC maker earned a profit of $1.9 billion, or 75 cents per share. That's down 9.5 percent from a profit of $2.1 billion, or 80 cents per share, the same quarter a year ago. It recorded a 1 percent uptick in revenue from a year ago, at $28.8 billion. Analysts were expecting revenue of $31.9 billion, and earnings of 93 cents per share. Part of the discrepancy is due to $431 million, or 18 cents per share, of adjustments, which HP is making in regard to amortization on purchased assets, restructuring and acquisition-related charges. Note that without the adjustments, HP would have delivered 96 cents per share as expected.

HP experienced revenue declines in every area of its business with the exception of Services, which is its EDS unit purchased last year. Services revenue increased 116 percent to $8.7 billion due mostly to the acquisition. Revenue from notebooks dropped 13 percent, and desktops 25 percent. HP's total PC shipments were also down 4 percent for the quarter.

Chief Executive Mark Hurd remained upbeat during a call with analysts. "We executed well in a challenging market," he said Wednesday afternoon. "I'm particularly pleased with the results of our Services segment. We now have a second segment with significant recurring revenues." The Services unit contributed one third of the company's profits during the first quarter.

But the Services business was the lone bright spot. "Though there were pockets of organic growth, the slowdown in IT spending was global," Chief Financial Officer Cathie Lesjak said.

HP said it saw pressure on its hardware businesses "due to the slowing global economy," and Hurd spent several minutes responding to an analyst's question about the effect Netbooks are having on the company's sales of traditional notebooks. Industry observers have expressed concern that Netbooks' low cost would drive down overall average selling prices. Hurd said so far that hasn't been issue for HP, but that time would tell. He did say that declining prices had more to do with the broadening of available products.

"It's not a move to Netbooks that's cannibalizing in this quarter. What you have is someone who was buying more thickly configured notebooks now buying more thinly configured," Hurd said. "There's not a significant phenomenon of ASPs (declining) in the HP lineup caused by Netbooks."

From a company-wide standpoint, both Hurd and Lesjak pointed to HP's cost structure as the key to its ability to ride out the recession with minimal damage. HP has long been very focused on keeping costs down and its executives are taking that to heart. Lesjak said during the call that the company would be reducing compensation and benefits across the board.

Hurd's base pay will decrease 20 percent, Executive Council members' base pay will be cut 15 percent each, while other executives' base pay will be cut by 10 percent. Exempt employees' pay will be cut by 5 percent, and non-exempt employees' by 2.5 percent, according to a company representative. HP will also decrease its 401(k) matching and employees can no longer buy discounted company stock.

"While the actions that we are taking today are difficult, we believe they will allow us to emerge from this recession in a powerful position to create value for our customers, employees and shareholders over the long term and be in a better position to fund 2009 bonus programs," the company said in a follow-up statement.

HP is forecasting that second-quarter revenue will decline 2 percent to 3 percent to between 84 cents and 86 cents per share.

"We assume market conditions seen in Q1 will persist," Lesjak said.

HP's stock dropped 6.4 percent to $32.02 in after-hours trading Wednesday.