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HP server business slides in Q1

Q1RevChart One quarter ago, Hewlett-Packard said it was poised to improve its standings during a tough economy. HP's services and ink business fared better over the last 90 days, but customers have stalled out their purchases of company servers, PCs, and even printers. After its Q1 report of 2009, HP said it remains poised.

The numbers in hardware and enterprise products fell sharply. HP reported sales declines in BCS servers (including Integrity systems) of 17 percent and 22 percent in Industry Standard Servers (including Proliants). Integrity now represents more than four of every five server dollars spent on Business Critical Servers. Customers are buying smaller: Amid downward reports on most server lines, blade server revenues rose 4 percent year over year. HP cobbled together an overall 1 percent rise in revenues, ekeing out a virtually flat quarter despite adding services business from the $22 billion-yearly EDS operations.

Services led HP's report of good news for the company. But that segment's contribution of an extra $4 billion in revenues since last year's Q1 had to offset a drop off of nearly $1 billion in Enterprise Storage and Servers. "Our results reflect the current market environment," said CFO Cathie Lesjak, "and in particular the slowing we saw in January, as customers re-evaluated their spending and  delayed purchases of equipment." The company even had to report that its printer business growth was finally halted after a seemingly-endless string of quarterly increases.

HP did a $28.8 billion quarter, a period which ended Jan. 31 and showed Services contributing virtually all of the revenue growth for the company. HP maintained a healthy support business while its customers chilled their buying plans. "Support performance was solid across the portfolio," Lesjak said in a conference call with analysts, "reflecting strong maintenance renewals and the sustained business value of our solutions."

Support is the last remaining outlet for HP 3000 IT dollars to flow into HP. But the ebb tide of sales was felt on every shore except services. HP reported that its printer and imaging business fell 19 percent in "a tough economic environment." Selling printers has gotten as difficult as moving servers. Lesjak said:

Customers are extending the life of their printer, and our installed base remains stable. We maintained strong market position in printing, and will continue to invest in market-leading innovation focused on high-page value segments and drive the conversion to digital printing.

Ink and supplies created approximately half of HP's profits for the period, a typical share. But services chipped another one-third of the black ink — leaving all other HP businesses to offer only about 20 percent of HP's earnings for the period. CEO Mark Hurd said the company has "lowered and variabilized our costs" of doing business. The word variable appeared often in the transcript of HP's conference call. HP has launched a program to tie salaries to company financial goals in what the firm calls variable pay.

HP counted an increase in market share across x86 systems as one of its bright spots along with the success of its EDS acquisition. The company had to discount its pricing to keep and increase share, a move that it said was offset by better costs for materials. HP will continue its restructuring layoffs, since it's cut only 9,000 jobs out of the 24,700 planned as part of the EDS deal.

The company reported $3.1 billion in non-Generally Accepted Accounting Practice (GAAP) operating profits for Q1. Bottom-line profits came in at $1.85 billion for the 90-day period. As in prior reports, HP counts on cost-cutting to maintain profitability. Hurd led off his chat with analysts by talking up HP's "leaner cost structure." The company pointed at its broad portfolio of businesses to keep its bottom line healthy. But Lesjak said that after a quarter which included the company's longest holiday shutdown, expenses including salaries could be adjusted further — for now downward, but even upward, if business improves.

We will continue to take actions to create a more variable cost structure, including reducing base pay and certain benefits across the company beginning in Q2. Consistent with our philosophy of pay for performance, we intend to increase variable pay in total if HP meets its FY ‘09 financial objective.

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