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Apotheker: HP Has Grown Too Big For Its Own Good

Wed, 02/23/2011 - 3:40am
Jordan Robertson, AP Technology Writer

SAN FRANCISCO (AP) — Hewlett-Packard Co.'s new CEO Leo Apotheker delivered some disappointing news to Wall Street on Tuesday after his first full quarter with the technology company.

Revenue growth, a persistent worry for companies of HP's size, will be slower this year than many analysts had envisioned. It was an unusual letdown that raised questions about the momentum of the company's acquisition-fueled transformation into a computing clearinghouse.

Investors punished HP's stock, one of the components of the Dow Jones industrial average. The stock shed 12 percent in extended trading following the release of the fiscal first-quarter results.

Few companies are as good a proxy for the technology market as HP. It's the world's biggest technology company by revenue and is a player in many far-flung markets, from personal computers and smart phones and tablets to technical services and computer servers and data storage.

Yet the latest report appears to point more toward the danger of companies setting ambitious financial targets in a shaky economy than any broad weakness in technology spending that will spill over to other companies.

Another heavyweight, Cisco Systems Inc., has also stumbled, but its problem is mainly that it relies heavily on sales to cash-strapped government buyers. That's an area that HP is far less exposed to.

HP said after the market closed that its net income jumped 16 percent to $2.61 billion, or $1.17 per share, in the three months ended Jan. 31. A year ago, it earned $2.25 billion, or 93 cents per share.

HP said that excluding one-time items, it earned $1.36 per share in the latest quarter. That was ahead of the $1.29 per share that analysts polled by FactSet expected on that basis.

Revenue rose 4 percent to $32.30 billion, from $31.18 billion a year ago. But analysts expected more: $32.96 billion, according to FactSet.

HP appeared to attempt to quell concerns by raising its full-year profit forecast. It expects net income in a range of $5.20 to $5.28 per share, excluding items, which is in line with analysts' target for $5.23 per share on that basis.

But revenue prediction fell short. HP said it expects revenue of $130 billion to $131.5 billion in its current fiscal year, which ends in October. Analysts expected $132.91 billion.

The guidance raised concerns because HP has spent heavily in recent years on acquisitions that were expected to propel substantial growth in areas that rival IBM Corp. has found highly lucrative, especially selling technical services to corporations.

Those changes were set in motion by Apotheker's predecessor, Mark Hurd, who was forced out in August in a sexual harassment scandal that led to Apotheker's hiring and the replacement of a third of HP's board of directors.

The latest numbers show that HP is benefiting from the changes in its business model — just not as much as some investors would like.

HP's keener courtship of corporations has helped the company grow in the face of anemic consumer demand.

Hurd was trying to make HP look more like IBM, which rescued itself from near collapse in the 1990s by focusing on outsourcing and other technology services that investors can count on being in strong demand in good times as well as bad because they can help save companies money.

Yet revenue in HP's services division fell 2 percent from the year-ago period. Weakness in short-term services contract signings drove the decline, Apotheker said.

It doesn't necessarily reflect an industry-wide problem. IBM's services revenue rose 2 percent in the latest quarter. IBM's services business is almost twice as big as HP's.

HP's personal computer division had a 1 percent decline in revenue. HP underestimated the extent of the weakness in the consumer PC market, Apotheker said. Consumers have scaled back their spending on PCs amid economic worries. They also now have more choices with the emergence of tablet computers.

HP's experience doesn't track exactly with the overall PC market, which remains hobbled by the Great Recession but has continued to grow, albeit slowly.

Shares in HP, which is based in Palo Alto, tumbled $5.83 to $42.40 in after-hours trading. They had closed the regular session down 44 cents, or 1 percent, at $48.23.

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