Analyst: HP Results Bad News for Microsoft

Hewlett-Packard's financial results could mean more trouble for Microsoft as the PC market continues to struggle, a financial analyst said Thursday.

HP's "weak systems results" and fiscal outlook suggest the "PC market remains challenging and unlikely to improve over near-term," said a research note by Barclays Capital analyst Israel Hernandez.

HP on Wednesday posted declines in all of its businesses except its EDS services business for its fiscal first quarter, ended Jan. 31. The company, like most others in the technology and other business sectors, is being affected by the global economic recession.

"HP's results and commentary suggest that PC, as well as server demand, remains subdued, a condition that is likely to persist given slowing global macro conditions that are rapidly impacting both consumer and enterprise sales amid mounting corporate layoffs," Hernandez wrote.

As a result, analysts will likely lower consensus estimates for Microsoft's fiscal third quarter, which the company is in now, he wrote.

It's HP's PC results that will affect Microsoft the most, especially if the market continues to decline.

Microsoft blamed lagging PC sales for missing estimates for its fiscal second quarter, the results of which it announced on Jan. 22. The company also said it would lay off up to 5,000 workers, an unprecedented move for the company.

Microsoft did not warn Wall Street or investors it would not meet expectations prior to announcing its first-quarter results, as some had expected. However, it did announce results and layoffs before the U.S. markets opened that day, which it typically does not do.

Microsoft had expected the PC market to grow between 10 percent and 12 percent in the first quarter, but it was flat. The company also blamed the increased interest in netbooks, or low-cost mini-notebooks, for its financial shortfall.

Barclays' Hernandez noted that netbooks are the only category of PCs showing growth, but that this is detrimental to Microsoft's client operating margin and its Windows average selling prices. Selling Windows XP on a netbook means less money for Microsoft than selling Windows Vista on a full-featured PC, he wrote.

Indeed, Microsoft's problem with netbooks lies with Vista, which has too big a hardware footprint to run reliably or well on netbooks. XP runs fine, so XP and Linux are what original equipment manufacturers are preinstalling on most netbooks.

Microsoft hopes to alleviate the Vista problem and take more advantage of the netbook market in the future with Windows 7, the next version of its client OS. Microsoft has said all versions of Windows 7 will run well on netbooks. Windows 7 is expected to be available before the end of the year or, at the latest, the beginning of 2010.

Microsoft next week is scheduled to give analysts an update on its current quarter on a conference call, which should give a better sense of how its quarter is shaping up.

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