News Column

Hewlett-Packard's quarterly sales top expectations, but profit declines

August 20, 2014

By Steve Johnson, San Jose Mercury News



Aug. 20--PALO ALTO -- Buoyed by a big increase in its personal computer business, tech giant Hewlett-Packard on Wednesday reported third-quarter sales that exceeded what Wall Street had forecast but its profit slumped from the same period last year.

The Palo Alto company said its sales totaled $27.6 billion for the three-month period that ended July 31, up about 1 percent from the same period a year ago. But its profit was just under $1 billion, compared with about $1.4 billion for the third quarter in 2013. That worked out to fully reported earnings of 52 cents per share.

Analysts polled by Thomson Reuters generally had expected fully reported earnings of 68 cents a share on sales of $27 billion. HP's earnings also were far shy of its own prediction of 59 cents to 63 cents a share. On a measure that excludes certain expenses, however, the company's earnings met analysts' expectations.

"I continue to be very encouraged by the progress we're making," CEO Meg Whitman said during a conference call with analysts. But she noted that some aspects of HP's business -- notably printing and software, which saw a decline in sales -- "still face some challenges."

HP reported its earnings before the market's official close, when its shares fell 36 cents -- or about 1 percent -- to $35.12. After disclosing its earnings, its stock price continued to slip in after-hours trading.

HP offers a wide variety of products, including computer networking switches, routers, servers, data storage devices, cybersecurity services and data-analysis software. But its biggest single source of money comes from sales of its personal computers, which grew 12 percent for the quarter compared with a year ago.

"Surprisingly, consumer PCs improved, which hadn't happened for many, many quarters," noted tech analyst Patrick Moorhead.

Nonetheless, Whitman noted that the overall market for PC's "continues to contract," due to dwindling interest from smartphone-obsessed consumers. That's been a big concern to HP's investors.

In addition, the corporation has been heavily criticized for some corporate acquisitions in recent years, including its $11 billion deal to buy British software company Autonomy in 2011. Shortly after completing that deal, HP wrote off $8.8 billion of Autonomy's value, saying it had been misled about Autonomy's worth. It also recently replaced two board members who'd been blamed for the purchase.

Autonomy's former CEO, Michael Lynch, has denied HP's claims that Autonomy's value had been artificially inflated. But those accusations are under investigation by U.S. and British authorities. In addition, the Autonomy purchase has sparked lawsuits by HP shareholders, alleging that HP didn't protect their interests when it pursued Autonomy.

Since becoming CEO in September 2011, Whitman has shuffled her executive ranks, attempted to focus the company on more profitable products and cut expenses, including laying off a good chunk of her workforce. After having nearly completed jettisoning 34,000 workers it began laying off in 2012, HP -- which has about 317,500 workers worldwide -- announced in May that it planned to cut an additional 11,000 to 16,000 employees.

The company's shares have been steadily rising for nearly a year. Nonetheless, Wall Street experts have a mixed view of its near-term prospects.

One positive is that many companies recently have been replacing their computers, in part because of Microsoft's decision to stop providing updates for its widely used Windows XP operating system. In addition, HP's market share in PCs and some computer-server niches "has also strengthened over the last three quarters," according to a recent report by Bernstein Research analysts. However, they added, "we worry that many of HP's end-markets are unlikely to see material revenue growth going forward."

In a separate note to their clients, Raymond James analysts concluded that "PC growth has peaked, as evidenced by commentary from several large resellers and distributors," and they called HP's ability to grow "questionable."



Contact Steve Johnson at sjohnson@mercurynews.com or 408-920-5043. Follow him at Twitter.com/steveatmercnews

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(c)2014 San Jose Mercury News (San Jose, Calif.)

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Source: San Jose Mercury News (CA)


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