HP's New CEO Steps Up Research Spending

Leo Apotheker, Hewlett-Packard Co.'s new chief executive officer, gave Wall Street an inkling of how he'll lead the company, saying he won't forsake cost containment as he spends more money to develop and sell HP's technology.

The world's largest computer maker will increase research spending, partly to create software that can make its products more compelling to customers, Apotheker said yesterday after HP forecast first-quarter profit that exceeded analysts' estimates. The company also plans to use its consumer technology to bolster business-computing products, he said.

"We have a secret formula, a secret sauce," Apotheker, who stepped into the role on Nov. 1, said on a conference call with analysts. Transferring consumer innovations to business products will provide "an enormous competitive advantage," he said.

Apotheker said he will continue the company's buying spree, focusing on software acquisitions, and work to boost growth in emerging markets. Still, shareholders are waiting for more details on how and when HP's investments will turn into viable products, said Abhey Lamba, an analyst at ISI Group in New York.

"Everything circles back to his comments that they are going to put more money into R&D," said Lamba, who recommends buying HP shares and doesn't own any himself. "The great question we need to monitor is when they start to see the benefit from those expenses."

HP gained 2.7 percent to $44.41 in late trading yesterday after rising 76 cents to $43.25 in regular trading on the New York Stock Exchange. The stock has lost 16 percent this year and about 7 percent since former CEO Mark Hurd resigned on Aug. 6.

R&D Spending

Research and development costs rose 16 percent to $814 million in the fourth quarter from a year earlier, outpacing revenue growth, Palo Alto, California-based HP said in its earnings statement. Spending increases in R&D and sales will be funded by cutting other operational costs, Apotheker said.

"We will never stop driving for efficiency," he said.

When Hurd became CEO in 2005, research spending was 4.1 percent of sales. In July of this year, days before he stepped down, the number had shrunk to 2.4 percent.

Apotheker, the former CEO of German software maker SAP AG, also said HP will reinstitute salary raises in the current fiscal year.

HP forecast profit that topped analysts' projections for the period ending in January as businesses replace aging personal computers and other equipment.

Excluding some costs, profit will be at least $1.28 a share on sales of $32.8 billion to $33 billion, HP said. That compares with $1.22 a share and revenue of $32.8 billion, the average of estimates compiled by Bloomberg.

Fourth Quarter

Fourth-quarter net income rose 5.2 percent to $2.54 billion, or $1.10 a share, from $2.41 billion, or 99 cents, a year earlier. Excluding some costs, earnings climbed to $1.33 a share in the period, which ended Oct. 31.

Sales increased 8.1 percent to $33.3 billion. Analysts had projected earnings of $1.27 a share on sales of $32.8 billion. HP has topped estimates in 22 of the past 23 quarters.

Revenue in the PC group rose 4.3 percent to $10.3 billion, while sales in the business storage and server business climbed 25 percent to $5.27 billion. Revenue from printers and printing supplies increased 8.4 percent to $7 billion.

"The strength in their numbers right now is what they're seeing in the commercial segment" and growth in the networking business, said Shannon Cross, an analyst at Cross Research in Livingston, New Jersey. She advises buying the stock and doesn't own it.

'Listening Tour'

HP expects fiscal 2011 revenue of $132 billion to $133.5 billion. Excluding some acquisition costs and other expenses, earnings will be $5.16 to $5.26 a share. Analyst predicted $132.3 billion in revenue and $5.09 in earnings.

Apotheker was ousted from SAP, less than nine months into his tenure as CEO, amid a slump in sales. He replaced Hurd, who resigned after an HP investigation found he had an improper personal relationship with an HP contractor.

Hurd sliced HP's expenses and increased profits and market value. He now serves as co-president at Oracle Corp.

After Apotheker addressed analysts last month, he embarked on a global "listening tour" to meet with HP's employees, customers and industry partners.

"I joked on the day of the announcement that I might set a world record for travel, and I think I may have actually done it."

With assistance from Douglas MacMillan in San Francisco.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE