Economy Hits HP Where It Hurts

Along with IBM, Cisco Systems and every other major IT infrastructure company, Hewlett-Packard has been trying to weather the recession with its core businesses intact. As HP's first-quarter 2009 earnings call demonstrates, the gloomy economy and softening in IT spending has had an impact on the world's largest PC vendor.

Hewlett-Packard announced earnings for the first quarter of 2009 that show the effects of a moribund economy on the world's largest PC vendor.

While net revenue grew 1 percent year over year, to $28.8 billion, it was a far cry from the double-digit growth that marked previous quarters. Declines hit in several areas, including the Personal Systems Group-down 19 percent overall, with laptop revenue for the quarter down 13 percent-and HP Software, which was down 7 percent for the quarter.

"We executed well in a challenging environment," Mark Hurd, chairman and CEO of HP, said during the earnings call on Feb. 18, citing the company's streamlined cost structure and market-share gains in key segments.

Referring to the company's recent restructuring, including the layoffs of 24,700 employees in the wake of its Electronic Data Systems acquisition, Hurd added, "We have more flexibility to be more competitive. In addition, we have not cut into our muscle."

By contrast, in the fourth quarter of 2008, HP's revenue and earnings beat Wall Street expectations despite a global economy in the midst of meltdown. The company had earned $33.6 billion, an increase of 19 percent year over year.

At that time, the company estimated its revenue in the first quarter of 2009 at somewhere between $32 billion and $32.5 billion; Wall Street estimates called for earnings of 93 cents per share, or $33.72 billion in revenue.

Despite the gloomy numbers, some analysts see HP's overall position as fundamentally strong.

"HP doesn't seem to be giving up market share; in fact, they're even gaining a little bit in places," Martin Reynolds, an analyst for Gartner, said in an interview. "They were already planning to reduce headcount and costs, which makes it easier for them to manage through the downturn, whereas you see Dell and AMD struggling."

One bright spot for HP was in the area of services, where the company doubled profits to $1.1 billion and increased revenue by 116 percent, due largely to its ahead-of-schedule integration of Electronic Data Systems.

The $13 billion acquisition of EDS in 2008 expanded HP's enterprise service offerings, putting it in a position to better chase IBM's services division. 

"Services hasn't been that affected [by the economy]; if people are serious about using services as part of their business, they're not really willing to compromise with those," Reynolds said.

HP is expecting its full-year 2009 revenue to decline 2 to 5 percent compared with 2008.

"We're not going to bank on the fact that the economy is going to get better," Hurd said. "That's not how we modeled things. We're going to make sure we're in a lean position as we go forward."