Hewlett-Packard CEO Expects ‘Tough Third Quarter,’ Memo Says

HP CEO Leo Apotheker
Leo Apotheker, chief executive officer of Hewlett-Packard Co., listens during an interview at the company's headquarters in Palo Alto, California. Photographer: Tony Avelar/Bloomberg

Hewlett-Packard Co. Chief Executive Officer Leo Apotheker told top executives that he’s bracing for “another tough quarter” in the July period and urged his deputies to “watch every penny and minimize all hiring.”

The company’s existing headcount plans are “unaffordable given the pressures on our business,” Apotheker wrote in the May 4 memo to deputies including Todd Bradley, executive vice president of the personal systems business, and Chief Financial Officer Cathie Lesjak. The memo was obtained by Bloomberg.

“Q3 is going to be another tough quarter, one in which we will be driving hard for revenue and profit,” Apotheker wrote. “We have absolutely no room for profitless revenue or any discretionary expenditures.”

Apotheker’s e-mail follows the release in February of a forecast for the second quarter, which ended in April, that missed analysts’ sales and profit estimates. Hewlett-Packard blamed the shortfall on sluggish demand for services and consumer products. The memo indicates that the company continues to come under pressure and suggests job cuts are in the offing.

“This is a continuation of what we’ve seen recently from HP -- weakness on the top line, but better cost controls,” said Brian Marshall, an analyst at Gleacher & Co. in San Francisco.

Hewlett-Packard, based in Palo Alto, California, dropped as much as 5.1 percent to $37.76 in extended trading. It had fallen 61 cents to $39.80 as of 4 p.m. in New York Stock Exchange composite trading.

Earnings Predictions

Following the release of the memo, Hewlett-Packard said it would move up its second-quarter earnings report to tomorrow morning, rather than the afternoon of May 18. The company is expected to report profit excluding certain costs of $1.21 a share on sales of $31.5 billion, the average estimate of analysts surveyed by Bloomberg.

Hewlett-Packard’s disappointing forecast for the April period cast a pall over Apotheker’s first quarter as CEO and underscored the dual challenges he faces. Hewlett-Packard’s reliance on home-computer shoppers leaves the company vulnerable to a consumer slump, while its services unit is using acquisitions to take advantage of a shift to cloud computing.

Apotheker is stepping up the company’s emphasis on higher-margin businesses including servers, storage computers and software, and lessening its dependence on PCs, said Marshall, who has a “buy” recommendation on Hewlett-Packard.

Executives led by Lesjak and Tracy Keogh, executive vice president of human resources, are “driving a full headcount re-planning process” aimed at reflecting “the new realities of the market and our position,” Apotheker wrote. The company had 324,600 employees as of Oct. 31, 2010, a company filing shows.

Apotheker’s Plans

Apotheker, who took over Nov. 1, outlined his strategy for the first time on March 14, announcing a deeper push into software and the expanding market for computing delivered via the Web. The company is starting a cloud-computing service that will let developers create applications for consumers and businesses that run on HP servers, Apotheker said at the time.

Hewlett-Packard also plans to put its WebOS mobile software onto a broader range of products, ramping up output to more than 100 million devices a year, he said. The company also announced a 50 percent increase in its dividend.

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