HP revenue takes a tumble as key units suffer

Fourth-quarter revenue falls seven percent as HP takes a big hit from hard drives, struggles with a change in direction, and as competitors Dell and IBM manage to hold earnings relatively steady
Written by Jack Clark, Contributor

HP's revenue fell seven percent in the first quarter, as the technology giant failed to hold income in important units steady, putting it behind competitors Dell and IBM.

Meg Whitman

HP boss Meg Whitman has multiple challenges ahead of her after first-quarter revenue fell seven percent and HP took a big hit from hard-drive shortages. Image credit: Jack Clark

On Wednesday, HP reported revenue of $30bn (£19.1bn) for the three months ending 31 January, down from $32.12bn the previous quarter and from $32.30bn in the same period in 2011. Earnings rose 600 percent to $1.5bn from $239m in the fourth quarter, when HP wrote off $788m from winding down its WebOS unit, but dropped 44 percent year-on-year.

"Frankly, it was a tough quarter, and every [HP business unit] had its challenges," chief executive Meg Whitman said on an earnings conference call.

The hard quarter comes after a tough 2011 for HP. Like its rivals, it has been hurt by a dramatic rise in hard-disk prices after flooding hit Thai production facilities. Unlike them, however, it has faced a costly and difficult legal spat with Oracle over support of HP's waning Itanium processor.

It has also worried customers by ditching its WebOS operating system and publicly considering the sale of its lucrative PC unit, and had to adapt to a swift turnover in chief executives. It also made a huge acquisition, spending £7.1bn on UK-based software analytics company Autonomy.

Hard-disk price rises

Whitman blamed hard-disk price rises, which hurt revenue for HP's personal and enterprise business units, as partly responsible for the poor first-quarter results. She also pointed to difficulties breaking into China and a worrying seven percent year-on-year fall in revenue for the "lifeblood of HP", its imaging and printing unit.

"We estimated that more than half of the revenue decline was due to the hard-disk drive shortage," HP's chief financial officer, Catherine Lesjak, said on the call.

That estimate suggests disk-drive problems were responsible for $1bn of the $2bn drop in overall takings at the company. "We were not as effective as we needed to be in matching that [reduced drive] supply with our demand," Whitman said.

HP rivals Dell and IBM had also been hurt by the price rises, but their earnings suffered to a lesser extent in the last three months. Dell took a hit of $150m on hard drives in the fourth quarter, in which it saw revenue rise two percent year-on-year to $16bn, it reported on Tuesday. For its fourth quarter, IBM reported revenue of $29.5bn, an increase of four percent on the previous quarter.

Overall, HP's top four units by revenue — the Personal Systems Group; Services; Imaging and Printing Group; and Enterprise Servers, Storage and Networking — all saw their takings shrink on a quarter-on-quarter and year-on-year basis. Collectively, these four divisions turned over $28.7bn, representing the lion's share of the company's revenue and a contraction of eight percent on the $31.3bn taken in the previous quarter.

The sole bright spots were in the software division — where revenue fell 7.5 percent on the previous quarter but rose 24 percent on the previous year — and the Financial Services division, which was slightly down on the previous quarter but up 13 percent on the previous year.

Whitman's strategy

"I think the magnitude of the task that Meg Whitman faces is becoming apparent," Simon Robinson, research director at 451 Research, told ZDNet UK. "HP is challenged on a number of fronts — it's too big, it's lost its mojo around innovation, it's grown through acquisitions, and it seems that era is over."

HP is challenged on a number of fronts — it's too big, it's lost its mojo around innovation, it's grown through acquisitions, and it seems that era is over.
– Simon Robinson, 451 Research

Whitman's strategy is to translate HP's breadth of hardware and software products into becoming an end-to-end IT company, much like IBM, Robinson said. They want to do everything "from printing your boarding documents to actually managing the airline reservation system", he suggested. HP is not alone in this: Dell plans to make the same transition.

However, the company faces a large number of challenges, not least of all that under former CEO Mark Hurd, it cut back on its research and development efforts. This means there are fewer innovations in the pipeline for Whitman than in previous years.

"IBM wrote the blueprint for how to build a profitable services business," Robinson said. "HP has kind of gone through the motions, but it hasn't invested enough in building a profitable services business."

Whitman said on the call she expects the difficulties will continue for HP a few quarters. She predicted that if things go well and the global economic system does not take another downturn, HP revenue could return to growth by the end of 2013.

On the call, HP executives did not touch on the Project Moonshot scheme to add low-power ARM processors into its servers and consumer devices. "My impression is that's still at an embryonic stage," Robinson said.

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