HP Financials Latest Sign of Weak Economy

Consumer and commercial PC shipments were positive in Q2, but Hewlett-Packard's U.S. PC sales have slowed.

While Hewlett-Packard's second quarter financial results were in line with Wall Street expectations, the numbers also seem to indicate the ongoing problems with U.S. economy are starting to affect both consumer and commercial spending, especially when it comes to buying PCs.

HP, which is headquartered in Palo Alto, Calif., is a major bellwether of the overall U.S. economy as well as PC market. For the last two years, Gartner and IDC surveys have continually ranked the company first in worldwide personal computer shipments, and this year is no exception.

For its 2008 financial second quarter, HP's overall PC revenue increased 16 percent for a total of $10.1 billion, while shipments shot up 21 percent. For the quarter, commercial client revenue increased 17 percent, while consumer revenue grew 16 percent.

While those numbers were good, the figures mask a slowing U.S. economy, which CEO Mark Hurd referred to as "spotty" during his May 20 comments to financial analysts. One reason for the company's 10 percent profits in the quarter stems from the fact that 70 percent of its sales now come from outside the United States. By comparison, revenues in the America increased a modest 4 percent in the quarter for a total of $11.1 billion.

In his analysis for Technology Business Research, Josh Farina found that while consumer PC numbers were good, the figures paled in comparison to the 41 percent growth HP announced during the year-ago quarter. The increase in commercial PC revenue was the lowest since the first quarter of 2007.

"I believe the consumer space is where most of the challenge is, as consumers hold back on discretionary spending in the face of continued increases in fuel costs and other goods and services that are impacted by rising oil prices," Farina wrote in an e-mail, adding that HP is now facing increased competition in the United States from the likes of Apple, which watched its PC shipments increase 25 percent in the first quarter of this year.

U.S. Business Is "Spotty" as PC Sales Slow

In his call with analysts, Hurd alluded to the increase in competition along with the results of the sluggish U.S. economy when it comes to PC sales.

"The U.S., to be specific, is just spotty," said Hurd, who added the company made inroads in other areas, including its storage products and high-end systems such as its Unix-based Integrity servers.

The HP numbers seem to reinforce reports from IDC and Forrester Research that found IT spending would decrease in 2008 compared to past years and that most of the cuts would come from hardware, such as PCs and servers. Farina believes that IT spending could pick up later this year or early next year and that HP is a good position to take some commercial business away from Dell as that company looks toward increasing its retail sales.

"I think late this year [or] next year we may see more of an impact from PC upgrades in the commercial market," Farina wrote. "My sense is that while Dell remains the leader in the commercial PC market, its focus on expanding into retail markets is leaving it vulnerable to competition in the commercial space."

Notebooks remain the hottest part of the PC market. During the second quarter, HP saw laptop revenue increase 31 percent. However, desktops, which remain an important part of the enterprise market, were flat in terms of revenue, which also seems to indicate slowing growth although many businesses are simply shifting to laptops as well.

Stephen Baker, an analyst with the NPD Group, said HP's numbers seem to illustrate the slowing of PC sales that first began appearing six months ago in both the consumer market as well as the enterprise.

While the consumer market hinges on a number of factors, the fact that PC sales to the enterprise seem to be slowing is an indication of where the U.S. economy is right now and how companies such as HP are looking to react.

"Clearly, on the commercial side, that [slowing PC sales] is all going to be linked to the economy," Baker said. "There are no saturation issues there. They have been saturated for years and years. It's just a replacement market and people are clearly going to hold back if they are concerned about the economy."