Thursday, February 19, 2009

HP (NYSE HPQ) confirms -- overall printing is down

Yesterday's earnings announcement by HP (NYSE HPQ) included the security analyst conference call, with its usual briefing followed by questions and answers. Two key passages, one in each section, reflected on some of the slowness the industry leader is seeing in its Imaging and Printing Group's (IPG's) business. As I've blogged about numerous times previously (e.g. see "Lyra Power Panel"), the remarks have to do with the economic downturn, and the purported correlation between print volumes and economic activity, with the added concept that new printer purchases are affected as well. (Since the beginning days of the LaserJet business 25 years ago, it has been acknowledged by industry insiders and customers alike that at least many printer models were so well made that upgrade and replacement cycles could be extended much beyond the typical time span associated with other tech products like PCs. Apparently that is still true today!)

I've included some of the comments, including the remarks by HP CFO Cathie Lesjak and CEO Mark Hurd, as well as the question by analyst Toni Sacconaghi of Sanford C. Bernstein.

Excerpted from the prepared remarks* (with my emphasis added via boldface type):

Cathie Lesjak - Hewlett-Packard Development Company, L.P. - EVP & CFO
Imaging and printing revenue for Q1 was $6 billion, down 19% year on year due to a tough economic environment. Segment operating margin increased 300 basis points to 18.5%, as favorable supplies mix and cost reductions were partially offset by hardware discounting. Compared to first quarter last year, total printer units were down 33%, and commercial and consumer hardware revenue declined 34% and 37% respectively. Supplies revenues declined 7% as lower end user demand more than offset the benefit of recent supplies price increases. Customers are extending the life of their printer, and our installed base remains stable. We maintained strong market position in printing, and will continue to invest in market-leading innovation focused on high-page value segments and drive the conversion to digital printing.

From the questions and answers session* (and again, with my emphasis added via boldface type):

Tony [sic] Sacconaghi - Sanford C. Bernstein & Company, Inc. - Analyst
Yes, thank you. I wanted to follow up on your commentary about supplies. If we look at supplies growth over the last three quarters prior to this one, it had been 9% to 11%. This quarter was it minus 7%, so about a 16% to 18% swing negatively. And yet, you should have begun to enjoy 2% to 5% supplies price increases. So if your install base is the same, and the usage is ultimately what has changed, are you really seeing about a 20% change in supplies usage in one quarter? Is that effectively what you are seeing, or is there other stuff behind it?

Cathie Lesjak - Hewlett-Packard Development Company, L.P. - EVP & CFO
Tony, I think your math is roughly right. I mean, there is lots of puts and takes in terms of what goes into what is driving thedecline in supplies. We certainly had a benefit of pricing, and we'll have that benefit in Q2 to Q4 as well -- in fact, an increasing benefit. But the bottom line is, folks, the end-user demand for supplies is down, and we actually expect with the change in channel inventories that we want to make in Q2, and that's included in our guidance already, but with that change that supplies growth will go yet even more negative than 7% in Q2 and Q3. So we do think there are significant headwinds still ahead of us on supplies growth, and that that won't turn around until the economy starts to rebound. And at that point in time, we do believe we get back to a market that's going to grow in the mid-single digits. But we do need the economy to start to turn around, so folks start printing more and frankly start stocking their pantry again, because we do think there is a certain amount of that going on in the consumer's homes as well.

Mark Hurd - Hewlett-Packard Development Company, L.P. - Chairman, CEO & President
I think, Tony, we do a lot of work on that as you know, and there is definitely an alignment between -- or at least some alignment between GDP and unemployment and printing. So when you get down to the end of the day, when you don't have a job, you are not printing as much is typically how it works. And we have some pretty sophisticated models. But there are also these other issues that Cathie described. We're trying to get the inventories in the right place, and with the speed that Cathie mentioned in our script, we have got some work to do. The price increase, to your point, is a positive. But to very blunt with you, I'm not entirely happy with how the inventory got distributed within the context of the quarter, meaning that we have the right thing at the right place at the right time, and we have got some work to do on that part of it. So some of it, Tony [sic], is the external factors that Kathy [sic] went through. We have got some internal stuff to get right to as we get back to this sort of range that Cathie described.

*The entire transcript is available at HP's web site.

Rob Sethre over at the Imaging Industry Wall Street Insider blog, "HP -- Looking for Balance".

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