HP’s many paths to profit

November 25, 2008, 2:21 AM UTC
HP printer sales are dropping, but high-profit ink sales remain strong. Image: HP

Where’s the most expensive popcorn in the universe? At the movie theater, of course. Theaters know you’ll pay because you’re a captive audience. That explains how Hewlett-Packard made so much money from ink sales last quarter, even though printer sales are slipping: by raising ink prices.

HP printer owners, after all, are themselves a captive audience; they’ll probably pay a little more for ink rather than ceasing to print altogether, or shelling out cash for a whole new printer. Partly because of their willingness to play along, HP offset printer sales that dropped 8% last quarter by boosting its extra-profitable ink sales by 9% over a year ago. (Not all of the increase came from higher ink prices, of course – but it sure helped.)

The ink maneuver is really about more than ink. It also helps us understand how HP CEO Mark Hurd managed to produce pretty good numbers on Monday for the quarter that ended Oct. 31, and why he is comfortable promising Wall Street more of the same in a chaotic economy. HP announced profits of $2.7 billion on sales of $33.6 billion, a 19% increase over last year thanks to the purchase of EDS; next year the company projects sales of $127.5 billion to $130 billion, a big jump over 2008 because of the EDS revenue. Because HP has so many employees and such a broad portfolio of products and services, Hurd has a lot of levers he can pull to hit its profit targets, even in times like these.

Besides the ink price lever, there are others: Cut travel. Postpone hiring. Mandate time off. And there are riskier moves that are also effective, like postponing PC price cuts. (HP plans to do all of these in the coming weeks, with caution.)

In a sense, this is the sort of environment where Hurd, a detail-oriented efficiency nut, seems most in his element. In the nearly four years since he took the reins at HP, he has worked the company over like a drill sergeant, trying to get operations as predictable as possible.

One can’t predict the future, of course, but one can prepare for scenarios. Hurd expects his executives to tell him how they’ll manage to hit their numbers if memory prices jump so high, or if corporate technology spending slows a given amount, or if printer sales take a dive. Perhaps the printer division will tighten its belt more than usual this quarter to deliver profit, and next quarter will be the PC division’s turn. The trick is to know the business so well that you can avoid squeezing any division too hard for too long.

“We are more confident in the bottom line than we are in the top line,” Hurd said when answering an analyst’s question about the future. In other words, we can’t control how much customers buy, but we can control how much we spend.

Time will tell whether Hurd’s plan will work as well in practice as it does on paper; somehow recessions tend to befuddle even the most brilliant business minds. But one must admire the profit-making flexibility that HP’s diverse business affords it. In this way it’s different from Dell , which mostly sells business hardware; or Cisco , which sells enterprise Internet equipment. Even Apple (AAPL) and IBM , despite their broad variety of products and services, don’t match HP; Apple focuses on consumers and IBM on businesses, while HP manages both.

But HP investors should be warned: no business is completely recession proof, and the best-laid plans go astray. Movie popcorn may be profitable, but if prices get too high – or if times get too tough – eventually, customers just stay home. (MSFT)

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