HP revenues lift slightly, but profit sharply falls by 13%

Services sparked a slight first-quarter revenue gain for Hewlett-Packard, but profits fell by 13% over the prior year, prompting the company's shares to fall 6% in after-hours trading.

In a conference call this evening, Hewlett-Packard CEO Mark Hurd told financial analysts that HP "executed well in a challenging market" by turning in a one percent revenue gain during the first quarter of this year.

In the Americas, HP's sales gain turned out to be even higher, amounting to an 11% increase over the same quarter last year.

However, one-time charges negatively affected HP's profits, leading the company to report $1.9 billion in earnings compared to $2.1 billion a year ago. Hurd said that without these charges, the company would have reported $2.3 billion in profits, which is what Wall Street had been expecting.

Almost all of the sales improvement came on the services side, where HP enjoyed a 112% quarter-over-quarter increase after last year's buyout of IT services provider EDS. The gains in services were felt across all segments: IT outsourcing; business processes outsourcing; technology services; and application services.

But although HP's market shares were up in almost all of the product segments where it plays, product revenues fell affecting profit margins, particularly in hardware markets such as printers, PCs, and servers, according to Hurd.

Essentially, many of HP's business customers are now spending only as much as they absolutely need to, the CEO said, adding that the trend became especially apparent in January. Where a customer might normally buy a double-blade server, the same customer now might choose a single-blade server. Hardware prices are falling, too.

Netbooks -- an area that HP just entered this quarter -- constituted one hardware bright note, he pointed out, under questioning by analysts.

Hurd said that while he hopes the economy will improve over the year ahead, HP will model its business with a continuing financial slowdown in mind, working harder at reducing excess inventories -- particularly of printing supplies -- in the channel.

Sales of printing supplies are linked to unemployment rates, he pointed out. HP will try harder to get supplies to "the right place [at] the right time."

In addition, after a large round of layoffs in the aftermath of the EDS buyout, HP will now institute cuts in base employee salaries and bonuses in the second quarter of this year, Hurd said. HP will also keep holding down costs through measures such as reductions to its travel expenses.

But HP doesn't plan further reductions in its sales force -- except perhaps to shift some salespeople from the "back end to the front end" -- and it will not be "taking down the number of engineers," either, said Hurd.