Desktops Outpace Laptops at HP, Which Posts 91 Percent Earnings Drop

Hewlett-Packard CEO Meg Whitman, at the helm for eight weeks, expressed cautious optimism about the company’s potential over the next several years, during the company’s Q4 earnings call Monday. HP profits plunged 91 percent in Q4 to $239 million, from Q4 2010, and the company is “getting back to basics in 2012,” Whitman said. The near-term focus is on driving execution and investing for the future, “but many of the FY ‘11 headwinds are still with us,” Whitman cautioned, saying the company is expecting declines in revenue and profit in fiscal 2012 before realizing “consistent, profitable growth in 2013 and beyond."

Following the company’s announcement last summer that it would spin off its PC unit -- a decision that it reversed in October -- Whitman said it will be important to provide “as much clarity as possible about our future. Whitman said over the course of the year, “and certainly on our last earnings call in August, we confused customers, employees, shareholders and partners on one fundamental issue around HP’s strategy.”

Contributing to HP’s poor performance was the global economy, a situation which Whitman expects to continue into 2012. Consumer business was down throughout 2011, and down 9 percent in Q4, she noted, and commercial business slowed as the year progressed, ending down 2 percent in Q4 year over year. She cited one-time events including the Japan earthquake and flooding in Thailand, saying the company is working to mitigate the effects of both natural disasters. Distractions within HP also affected performance, she said, citing the CEO change, strategy shifts and “many news cycles.”

HP’s Personal Systems Group brought in $10.1 billion in revenue for Q4, down 2 percent from the prior year, said Chief Financial Officer Cathie Lesjak. Consumer client revenue in Q4 was down 9 percent year over year, with notebooks seeing a bigger decline than desktops, she said. Total units shipped were up 2 percent year over year but average selling price declines negated the gains, she said. “We saw little growth in desktop revenue year over year” and a 4 percent decline in notebook revenue, she said. Desktops and laptops continue to be affected by weak consumer demand, she said.

Net revenue in HP’s imaging and printing division was down 10 percent year over year in revenue to $6.3 billion, due to channel inventory reductions, weakness in Europe, the Middle East and Africa and “softening consumer demand, particularly for supplies,” Lesjak said. A commercial printer revenue increase of 4 percent was offset by an 8 percent drop in consumer revenue, including an 8 percent decline in units, she said. Printer supplies revenue “closely follows economic cycles,” Lesjak said, and continued to be affected by softness in consumer demand as a result of global unemployment figures. Supply revenue was below expectations for the quarter, and “we ended the quarter with higher channel inventory than we would have liked in some regions,” she said.

Regarding whether the drop in printing revenue is the start of a cycle or a larger issue, Whitman said she doesn’t believe the numbers point to a “secular trend decline in printing. There is more information, more things to be printed, more people who have the capacity to print than ever before,” she said. The revenue drop was about “correcting higher than normal supplies in the channel” from Q1 and Q2, she said. The slowdown in Q3 and Q4 “was a surprise to us,” she said, both on the commercial and consumer sides. “Supplies are almost a perfect predictor of economic health,” she said. “Consumer and small businesses are worried about the economic environment and they're not buying as much printing supplies,” she said. The company continues to invest in graphics and e-print technologies designed to increase the amount of printing done, she said.

The flooding in Thailand remains “pretty dynamic,” Whitman said, and the company’s four disk drive suppliers don’t have “a complete picture of when they'll be back up and running,” she said. The company made strategic buys of hard drives in early October and expects to get “more than our fair share of drives” because of long-term relationships with suppliers and a timely response to the shortage, she said. “I think this is going to affect the industry pretty dramatically because it’s PCs, servers, storage … and I think we're going to see shortages in Q1 and Q2,” she said.

In reviewing HP’s 2011 fiscal year, Whitman identified “three buckets of problems,” starting with macroeconomic trends. Internal HP issues represented another third of the problems, including the China business that was hit by recalls by Nvidia and Intel. “There’s no question our mid-August announcement hurt us in China more than any other market,” she said, citing “brand damage” and “uncertainty” as collateral from that decision. “I had customers telling us they thought we were getting out of the hardware business entirely,” she said. “No question we did ourselves in there.” The other bucket was “the distraction factor,” she said. The company needs to “get out of the news cycle and reduce the drama here,” she said.

Going forward, Whitman still sees “economic headwinds,” driven largely by European market uncertainties, along with internal HP issues. “We have work to do in each and every one of our businesses,” she said.