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HP revenue outlook dims as PC sales drop 20%

The world's largest computer maker startles analysts by scaling back its revenue forecast for the second time in as many quarters. It cites weak demand for desktops and notebooks, manufacturing problems in Japan and growing interest in tablets, a market in which HP has lagged rivals.

May 18, 2011|By David Sarno, Los Angeles Times
  • A Hewlett-Packard printer is displayed for sale while a customer browses at a Best Buy store in Orem, Utah. HP said it earned $2.3 billion in its fiscal second quarter, up 5% from a year earlier, but lowered its revenue forecast for the year as demand for PCs wanes.
A Hewlett-Packard printer is displayed for sale while a customer browses… (George Frey, Bloomberg )

Hewlett-Packard Co., the Silicon Valley giant whose fortunes have been tied to the personal computer, is facing an uncertain future as the popularity of desktops and notebooks wane.

The world's largest computer maker said Tuesday that consumer PC sales in the three-month period ended April 30 dropped more than 20% from the same quarter last year, and startled analysts by forecasting that its revenue this year would be lower than previously expected.

The chilly outlook ignited a selloff among the company's investors, and the stock dropped close to 10% early in the day before recovering slightly to close at $36.91, a loss of 7.3%.

In addition to weak PC sales, HP cited an array of issues that were slowing the company, including manufacturing problems resulting from the Japan earthquake and consumers' growing interest in tablet computers, a market in which HP has lagged rivals.

HP chief executive Léo Apotheker hinted that his predecessor, Mark V. Hurd, had mishandled the company's strategic priorities and left the company behind competitors in online business services.

"It should have been happening quite some time ago that we should have been moving into these higher value-added businesses," Apotheker said, without specifically naming Hurd, in a conference call with investors. "So it will happen now, there's no doubt about that."

Hurd, who left the company last year after a female contractor accused him of sexual harassment, was credited for reviving the computing giant after it lost steam during the last decade. Its stock surged during his tenure.

But since Hurd left, the stock has declined more than 20% as Wall Street continues to question Apotheker's handling of the company.

"Investor confidence is definitely shaken," said Shaw Wu, a Sterne Agee analyst. "There's frustration around the way the company's being run."

In a note to clients, Gleacher and Co. analyst Brian Marshall agreed.

"The investment community holds sacrosanct both consistency and lack of surprises from its portfolio companies," he wrote. "Unfortunately HPQ is delivering neither."

Still, both Wu and Marshall kept a "buy" rating on Hewlett-Packard's stock, emphasizing that the company had a number of still-strong businesses and room for growth in the weaker ones.

HP has been late to enter the burgeoning market for tablets, which are set to outsell laptops in the U.S. by next year, according to Forrester Research.

The company said Tuesday that its long-awaited TouchPad, based on software from Palm Inc., which it acquired last year, would be available sometime this summer. Much of the tablet business is now controlled by Apple Inc. and its popular iPad, while HP's Slate 500, released quietly last year, has generated little interest.

HP had originally planned its earnings announcement for Wednesday, but moved it up a day after Bloomberg News published a leaked memo from Apotheker warning staff members of "another tough quarter" ahead, and that they should "watch every penny and minimize all hiring."

Tuesday marked the second time in as many quarters that the company scaled back its forecast for the year. In February — in Apotheker's first quarter as chief executive — HP said that it expected its 2011 revenue would be about $2 billion less than it had previously thought.

The dour outlook Tuesday came despite the company reporting that it earned $2.3 billion in its second quarter, up 5% from a year earlier. Revenue rose 3% to $31.6 billion on higher sales of software to businesses.

Rival Dell Inc. also reported higher quarterly profits Tuesday — $945 million compared with $341 million a year earlier — as it cut expenses and increased revenue from computer services. But like HP, Dell said sales of desktop PCs declined in the quarter.

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