HP Shares Down On Missed Revenue Target

The computer maker's 16% increase in first-quarter profits wasn't enough to meet its forecast, due to weakened sales in its consumer and tech services units.
Slideshow: HP Tablet Announced
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Slideshow: HP Tablet Announced

HP saw profits rise in the first fiscal quarter, but the computer maker fell short of its own revenue forecast, due to a drop in sales in its consumer PC and technology services businesses.

HP reported Tuesday that net income for the quarter ended Jan. 31 rose 16% to $2.6 billion, or $1.17 a share, from $2.3 billion, or 93 cents a share, the same period a year ago. Revenue increased 4% to $32.3 billion from $31.2 billion, and gross margin rose 1.5 percentage points to 24.4%.

HP was expected to report stronger results based on its forecast in November of earnings from $1.28 a share to $1.30 a share and revenue between $32.8 billion and $33 billion. In addition, rival Dell reported last week that strong sales of technology and services to businesses in its fiscal quarter ended Jan. 28 drove profits up 177% year to year, as revenue increased 5% to $15.7 billion. Like HP, Dell also saw sales of consumer PCs fall. In after-hours trading, HP shares fell more than 11.5%.

HP's personal systems group, which includes business and consumer PCs, reported a 1% drop in revenue, as sales of consumer PCs fell 12%, which offset an 11% increase in revenue from commercial PCs. HP's services division saw a 2% decline year over year, due mostly to a drop in contracts for short term, value-added services, and add-on IT outsourcing projects.

During a conference call with analysts, it was pointed out that besides missing its previous forecast, HP's guidance for the current quarter, when compared to the first fiscal quarter, is the lowest in nine years, other than in 2009, which was the height of the economic recession.

"In terms of the guidance, there is no question that we are being prudent and we're remaining cautious about the environment for consumer PCs," said HP CFO Cathie Lesjak.

HP expects a recovery by its personal systems group in the second half of the year, which is expected to benefit from improvements in PC sales in China and the release later this year of two smartphones and a tablet based on HP's WebOS, which it acquired in the $1.2 billion purchase of Palm last year. The company also expects to see an improvement in signings of short-term service contracts and outsourcing projects.

"We are very confident in our ability to deliver the updated fiscal 2011 outlook... we have scrubbed these numbers really hard and we believe these are the right numbers," Leo Apotheker, president and chief executive of HP, told analysts.

Apotheker, former CEO of German software maker SAP, was named HP CEO late last year following the resignation of Mark Hurd, who left amid allegations of improprieties. Hurd is now co-president of Oracle.

Other than consumer PCs and services, sales of HP's other divisions were up. Revenue from the company's printer group rose 7% year over year, software grew 5%, and enterprise servers, storage, and networking increased 22%.

Enterprise sales showed that businesses have continued to refresh computer systems after delaying purchases during the economic downturn in 2009 and the first half of 2010. HP believed businesses were about halfway into their spending spree.

"We actually see a rather dynamic market and I would say we're actually in mid-inning to use the American expression... this market still has some legs to go," Apotheker said.

For the current fiscal quarter, HP forecast revenue of $31.4 billion to $31.6 billion and earnings per share (EPS) from 99 cents to $1.01. For the full year, the company predicted revenue from $130 billion to $131.5 billion and EPS from $4.46 to $4.54.