HP’s Profit Climbs 34%, but Profit Margins Stir Concern
Hewlett-Packard Co. said Tuesday that strong sales of servers and computer services helped boost second-quarter profit 34%, but the gains were tempered by concerns about lower-than-expected margins in its powerhouse printer division.
The world’s No. 2 maker of personal computers reported a profit of $884 million, or 29 cents a share, in the three months ended April 30, up from $659 million, or 22 cents, a year earlier. The earnings were in line with analysts’ estimates.
Revenue rose 12% to $20.1 billion, beating expectations of $19.3 billion, according to Thomson First Call.
Palo Alto-based HP provided its first sales estimate for the second half of the year, which also exceeded analysts’ expectations and helped send the company’s shares higher in after-hours trading.
Although the results were largely positive, some analysts expressed concern that the higher-than-expected sales did not result in higher-than-expected profit.
“It looks like expense control was good in the quarter, so the largest problem is with margins,” said Mark Stahlman, a computer hardware analyst with San Diego brokerage Caris & Co.
HP archrival Dell Inc. has been putting intense pricing pressure on PCs, servers and storage systems, forcing profit margins to be ever thinner. HP’s operating profit margin on PCs, for instance, was 0.75% in the just-concluded quarter, down from 1% in the first period.
Dell entered the printer business 14 months ago and said last week that it had reached 14% of the all-in-one printer market in the U.S. HP’s share is more than 50%, and HP Chief Executive Carly Fiorina told analysts on a conference call that Dell’s gain had been offset by a corresponding loss of share by Lexmark International Inc., which makes the printers for Dell. “The reality is we have record revenue, record profit and we’re gaining share” in printers, she said.
Nonetheless HP’s second-quarter operating profit margin for its printing unit was 15.6%, down from 16.75% a year ago.
Overall sales showed healthy double-digit growth in Europe and Asia but were relatively unchanged in the U.S., where HP gets 35% of its revenue. That is worrisome, said Bill Schaub, vice president of Emeryville, Calif.-based Techtel Corp., a technology-demand research firm, noting Dell said last week that its second-quarter revenue grew 21% and that about 65% of sales were in the U.S.
HP’s golden goose, its imaging and printing division, once again provided the bulk of the company’s profit. The unit had an operating profit of $953 million, up 3.8% from a year earlier, representing 71% of HP’s overall operating profit.
The printing division is crucial to HP’s profit because it creates a steady stream of high-margin ink and toner replacements. “A significant part of their profit comes out of ink, either toner or ink cartridges,” Schaub said.
The newly formed Technology Solutions Group, which includes servers, storage, software and services for business customers, had an operating profit of $400 million, up from $292 million a year ago. HP’s PC unit reported an operating profit of $45 million, nearly double the $23 million of a year ago.
For the fiscal year’s second half, Fiorina raised HP’s revenue estimate to between $39.7 billion and $40.7 billion, higher than analysts’ estimate of $39.7 billion. She backed the consensus of analysts that operating profit would be 74 cents a share.
The forecast sent shares of HP, which had risen 33 cents to $19.83 in regular New York Stock Exchange trading Tuesday, 92 cents higher to $20.75 after-hours. The company reported results after regular trading ended.
