HP slashes outlook, spends on services overhaul

NEW YORK Tue May 17, 2011 2:10pm EDT

A logo of HP is seen outside Hewlett-Packard Belgian headquarters in Diegem, near Brussels, January 12, 2010. REUTERS/Thierry Roge

A logo of HP is seen outside Hewlett-Packard Belgian headquarters in Diegem, near Brussels, January 12, 2010.

Credit: Reuters/Thierry Roge

NEW YORK (Reuters) - Hewlett-Packard Co slashed its 2011 profit forecast as it prepares to spend heavily to revamp a troubled division that provides everything from computer maintenance to high-level tech consulting, sending its shares tumbling over 7 percent.

Chief Executive Leo Apotheker, who took the helm in September, blamed the division's "missed opportunities" under his predecessor Mark Hurd.

He vowed on Tuesday to revamp the division to focus on consulting, cloud computing and higher-margin businesses, moving away from less-profitable endeavors like maintenance.

HP also trimmed its sales forecast for the second straight quarter, sending its shares to their lowest level since June 2009, wiping out about $7 billion in market value.

The latest revision, the second since Apotheker took over seven months ago, raised questions about the former SAP CEO's ability to spark growth at the technology behemoth.

Several Wall Street investment houses, including Credit Suisse and Barclays, responded to the results by lowering their recommendations or price targets on the stock.

The expansion in services comes as the global PC industry is under siege from the growing popularity of mobile devices such as Apple Inc's iPad. Investors will get more insight on the weakening demand for PCs when rival Dell Inc reports after the bell.

HP's sales of PCs and other devices slid 5 percent in the second quarter to $9.4 billion. Consumer PC sales in particular dived 20 percent -- greater than the company anticipated.

"It sounds like Hurd took too many costs out of (the services) business and didn't reinvest in positioning it in cloud and other things," said Cross Research analyst Shannon Cross. "Leo is doing that now."

The sluggish industry-wide consumer PC market plus the lingering supply impact of Japan's earthquake are expected to hurt the world's largest technology company's profits for the rest of the year.

TAKING IT SERIOUSLY

Apotheker indirectly blamed the services unit's problems on Hurd, who left the company in August amid allegations of sexual harassment.

HP acquired the division when it bought Electronic Data Systems in 2008 -- a major initiative spearheaded by Hurd -- adding services ranging from help-desk support for PCs to advising corporations on rebuilding data centers to take advantage of new "cloud computing" technologies.

Cloud computing refers to the use of Web-based servers to deliver services to large businesses and organizations.

Apotheker said that business failed to expand quickly enough into more profitable services such as consulting, where it vies with International Business Machines Corp and Oracle Corp Accenture.

"We are missing significant market opportunities," Apotheker said in an interview with Reuters.

In a signal that HP intends a serious expansion of the services division, Apotheker stripped the group's previous manager of responsibility and put the arm under the direct control of HP veteran Ann Livermore -- who heads up the enterprise division -- until a new chief can be found.

He also plans to hire more people to shore up consulting.

Apotheker wants to boost earnings by pushing into sectors such as cloud computing, which for HP involves helping companies to revamp their data centers. Investors are looking for signs of progress on that strategy.

"HP has been known historically for consistency," said Gleacher & Co analyst Brian Marshall. "Now they are known for inconsistency."

The spending on services may have to be offset by tight cost control elsewhere. It comes as HP grapples with newfound competition in the server market from Cisco Systems Inc and Oracle Corp, limp consumer spending on PCs, and the expansion into cloud computing.

"We will manage our costs very prudently ..., including our salary costs," Apotheker said. "We want to create enough resources to expand our business."

The company is not planning any job cuts but will watch its headcount, he added.

HP cut its outlook for full-year profit, excluding items, to "at least $5.00 per share" from a previous "$5.20 to $5.28." It also cut its full year revenue outlook to $129 billion to $130 billion from a previous $130 billion to $131.5 billion.

Revenue in the fiscal second quarter ended April 30 rose to $31.63 billion, up 3 percent from the previous year and slightly above the average estimate of $31.52 billion, according to Thomson Reuters I/B/E/S.

Strength in the quarter was driven by its commercial and enterprise divisions as businesses continued to spend on technology.

The company reported net income of $2.3 billion, or $1.05 a share, up from $2.2 billion, or 91 cents a share, a year earlier. Excluding items, HP earned $1.24 a share, better than the average analyst estimate of $1.21 a share.

HP shares fell as low as $36.04, before trading down 7 percent at $37.02 in at mid-afternoon on the New York Stock Exchange.

(Additional reporting by Jennifer Saba, and Angela Moon; Editing by Edwin Chan, Derek Caney and Richard Chang)

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