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Hewlett-Packard Q1 Revenue Falls Short, Currency Woes Hammer Outlook

HP expects a weaker Q2 than analysts had forecast, in part because the strong U.S. dollar is hurting its results.

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Shares of computing and IT services giant Hewlett-Packard fell by more than 7 percent in after-hours trading after the company lowered its outlook for the coming year.

HP posted earnings per share of 92 cents, up 2 percent year-on-year, on revenue of $26.8 billion, which fell 5 percent year-on-year. In a statement, HP said it is experiencing a “significant impact” from the effect of currency exchange rates.

Earnings were better than the consensus view of analysts polled by Thomson Reuters: They had called for HP to post per-share earnings of 91 cents. But revenue fell short of the $27.4 billion consensus by about $600 million.

HP also said it expects to earn between 84 and 88 cents a share in the second quarter, well below the consensus view. For the year it said it expects to earn between $3.53 and $3.73 per share, where analysts had expected $3.95 per share. It explained much of the lowered expectations on the effect of currencies.

HP does about two thirds of its business outside the U.S. That means that when the U.S. dollar is strong relative to other currencies like the Japanese Yen and the Euro, it loses out when it converts those payments into dollars. Typically HP uses hedging strategies to offset the swings in currencies, but sometimes those hedges aren’t enough to make up the difference.

HP said it expects the headwinds from currency exchanges to impact revenues by as much as 6 percent in 2015, versus the 2 percent impact it expected at the end of last year. A currency effect of that size would amount to about $3.3 billion in revenue, $1.5 billion in operating profit, about 60 cents in earnings per share. Roughly half of that impact — about 30 cents — to EPS can be managed by adjusting the price on products and other actions, but it will have to take the remaining 30 cents on the chin and thus lowered its profit forecast for the year.

In a statement, CEO Meg Whitman laid much of the blame for weak results on the currency effects. “While we were able to manage the impact of currency in the quarter and delivery earnings as expected, we believe the impact on FY15 will be significantly greater than we anticipated in November.” Whitman said that HP will seek to offset the currency impacts by “re-pricing and productivity,” but said more radical action to more fully account for the currency swing would require “reducing investments and mortgaging our future…”We won’t do that.”

In its lines of business HP showed some signs of strength in a few places where most businesses showed declines. Personal systems, HPs, personal computing unit, posted flat sales of $8.5 billion, led by notebook sales that grew by 9 percent year-on-year. Sales of consumer PCs rose 2 percent. PC sales to businesses fell slightly.

In printing, once HP’s crown jewel, sales fell 5 percent to $5.5 billion. Sales of printers to businesses were flat, while consumer hardware sales fell 6 percent. Supplies revenue also declined by 5 percent. On a conference call CFO Cathie Lesjak says the weakness in the Japanese Yen helps HP when it buys components from Japanese companies, but makes it harder to compete with Japanese printer companies like Toshiba on selling prices.

Revenue in the Enterprise Group was flat year-on-year at $7 billion. Server sales rose 7 percent, and sales of storage hardware were also flat. Networking sales declined 9 percent. On the conference call Whitman called out the networking results “disappointing.”

The long-troubled Enterprise Services unit saw another decline of 11 percent year-on-year to $5 billion. Software sales fell 5 percent. Customers of that business have been leaving HP, but, Whitman said that its level of profit is in line with expectations. She also called today announcement of a deal with Deutsche Bank, which called “a hard fought win.” On the conference call Lesjak said the services unit has won another significant deal that hasn’t yet been announced.

HP exited the quarter with $13.3 billion in combined cash and short-term investments. It spent $1.6 billion buying back shares and $304 million on dividend payments.

HP announced last fall that it will break into two companies. One will be called HP Inc. and will be made up of its PC and printing business units. The other will be called Hewlett-Packard Enterprise and will comprise its corporate IT hardware, networking and services business units.

Lesjak said that HP expects to take a $1.3 billion charge in 2015 related to the separation and another $500 million fiscal 2016.

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