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Hewlett-Packard Cuts Forecasts as Consumers Curb PC Buying

Hewlett-Packard Co. Chief Executive Officer Leo Apotheker. Photographer: Ryan Anson/Bloomberg
Hewlett-Packard Co. Chief Executive Officer Leo Apotheker. Photographer: Ryan Anson/Bloomberg

May 17 (Bloomberg) -- Hewlett-Packard Co., the biggest personal-computer maker, cut a billion dollars from its sales forecast for the year and missed analysts’ profit projections as consumers shunned PCs and services margins narrowed.

Full-year sales will be $129 billion to $130 billion and earnings excluding some items will be at least $5 a share, Palo Alto, California-based Hewlett-Packard said in a statement today. Analysts estimated sales of $130.3 billion and earnings of $5.24, the average projections in a Bloomberg survey. Third-quarter forecasts from HP also missed analysts’ estimates.

The projections came a day after Bloomberg News reported Chief Executive Officer Leo Apotheker sent a memo warning of “another tough quarter” in the July period. The CEO’s second-straight disappointing forecast reflects rivalry from tablets such as Apple Inc.’s iPad and lower margins in services. Apotheker may be hard pressed to find savings after his predecessor, Mark Hurd, eliminated more than 48,000 jobs.

“The Street was willing to give Apotheker a get-out-of-jail-free card the first time,” said Pat Becker Jr., principal of Portland, Oregon-based Becker Capital Management Inc., which holds Hewlett-Packard as part of its $2.5 billion in assets. “There was a belief on the Street that Hurd had pulled the expense-cutting string about as taut as you could pull it and the next guy had to come in with some vision and strategy.”

‘Watch Every Penny’

Hewlett-Packard dropped $2.89, or 7.3 percent, to $36.91 at 4 p.m. in New York Stock Exchange composite trading.

In February, HP predicted full-year sales of $130 billion to $131.5 billion and earnings of at least $5.20 a share.

In his May 4 message, Apotheker urged deputies to “watch every penny and minimize all hiring.” Following news of the missive sent via e-mail, Hewlett-Packard moved up its earnings report to this morning, rather than tomorrow afternoon.

For this quarter, earnings excluding some items will be $1.08 a share, the company said. That missed the $1.23-a-share average projection, the second straight quarter the company’s forecasts fell short. Revenue will be $31.1 billion to $31.3 billion, compared with analysts’ $31.8 billion average estimate.

Purchases of smartphones and tablets are crimping demand for PCs, said Brent Bracelin, an analyst at Pacific Crest Securities in Portland, Oregon.

PC Substitution

The industry’s shipments declined 3.2 percent last quarter, research firm IDC reported in April. Tablet sales will almost triple this year, IDC projected in January.

Hewlett-Packard also needs to prove that its technology-services business can tackle companies’ transition to cloud computing, the delivery of applications and data through the Internet, said Bracelin, who rates the stock “sector perform.”

The pressures facing Hewlett-Packard “aren’t going away soon,” he said.

Earnings at the services business fell to $1.36 billion in the quarter that ended April 30 from $1.4 billion a year earlier. Sales increased 1.5 percent to $8.98 billion.

“They need to fix the services business,” said Abhey Lamba, an analyst at International Strategy & Investment Group in New York. “The issue in services, where Apple is not really hurting them, that’s kind of isolated to HP.”

The company plans to hire a new executive to manage its enterprise-services unit, reporting to the CEO, Apotheker said.

Push for Margins

Hewlett-Packard is also speeding efforts to offer customers more profitable technology services. The company has been signing information-technology outsourcing deals that hurt profit margins because the projects are labor-intensive. It needs to bulk up in services that help customers create software applications or outsource customer service, he said.

“We have overinvested operationally and underinvested strategically,” he said. “It is my top focus going forward.”

Sales in the personal systems group fell 5.4 percent to $9.42 billion as revenue from consumer PCs dropped 23 percent.

Second-quarter earnings, excluding some items, were $1.24 a share, while revenue was $31.6 billion. Analysts had estimated $1.21 a share and sales of $31.5 billion.

Net income rose to $2.3 billion, or $1.05 a share, from $2.2 billion, or 91 cents, the year earlier.

Apotheker, who joined as CEO on Nov. 1, gave his initial quarterly report in February, which was marred by a forecast that missed estimates. The shares fell 9.6 percent the next day.

“HP is a large company and for Leo to kind of make changes very quickly is going to be tough,” Lamba said.

(The company held a conference call today to discuss results. For a replay, go to {LIVE <GO>}.)

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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