HP Reports Solid Profits, but Weak Forecast Hurts Stock Price

There seems to be a trend in early 2011 regarding quarterly earnings reports from tech companies-a trend in which they report solid revenue and/or profits increases but then submit weak forecasts that spoil the good news for investors.

Hewlett-Packard is the latest to join the parade. NetApp, Seagate and Symantec also reported similar mixed-message Q1 earnings reports.

The good news for HP on Feb. 22 was that it reported a healthy 16 percent rise in profits as its overall sales advanced by about 4 percent for its first fiscal quarter 2011. However, HP also cut back its 2011 revenue projections due to falling demand for its personal computers and printers.

The sales forecast sent its shares down more than 12 percent to $42.38 in after-hours trading. The common share price had been $48.23 at the NYSE closing bell.

HP said Feb. 22 that it lowered its yearly sales outlook due to what it sees as weaker demand for consumer PCs and printers and slowed-down growth in enterprise and consumer services. These services include IT outsourcing, data center design and provisioning, online cloud storage and computing, and several others.

HP reported revenue of $32.3 billion, up 4 percent from the year-ago sales period. But industry analysts had expected the Palo Alto, Calif.-based company to show earnings of $1.29 a share, on revenue of $32.96 billion.

For its current (Q2 2011) quarter, HP said it expects revenue to come in at between $31.4 billion and $31.6 billion, a negligible decrease. The company adjusted earnings down a bit to about $1.20 a share; Wall Street analysts had projected earnings of $1.25 a share on revenue of $32.62 billion.

HP's cash flow in Q1 was good. "HP's financial strength and discipline helped generate $3.1 billion in cash flow from operations, up 28 percent year over year," said Cathie Lesjak, HP executive vice president and chief financial officer.

HP said it expects full-year fiscal 2011 revenue in the range $130 billion to $131.5 billion, GAAP diluted EPS in the range of $4.46 to $4.54, and non-GAAP diluted EPS in the range of $5.20 to $5.28.

HP 'Can't Buy a Software Strategy'

One analyst, Rob Cihra of Caris & Company, said in a media advisory that HP is approaching a strategic crossroads because the company "simply can't buy a software strategy."

"We see consumer PCs and inkjet printing weak and down year-over-year with minimal services growth, but positively offset by enterprise IT demand boosting commercial PCs (especially ASP), x86 servers, networking and laser printing," Cihra wrote.

"This said, whereas PCs drove its top line and cost-cuts its bottom line over the past five years, we see HP now facing bigger strategy choices, following recent CEO/board changes."

Because new CEO L??«o Apotheker has a 30-year software background and was the former chief executive of Germany's SAP, the world's largest enterprise software maker, HP is hoping Apotheker will be able to lead the revitalization of its enterprise software businesses.

The HP board also added five new members on Jan. 20. Several of the previous board members had been closely aligned with ousted former CEO Mark Hurd.

Some investors and analysts have suggested that HP may need to acquire more software-making companies to get it back into the game with competitors such as Oracle, VMware, IBM, Cisco Systems and EMC.

Cihra alluded to a key upcoming briefing with Apotheker-to which eWEEK has been invited-that he expects to offer more insight into the company's long-term strategy.

"We see HP's March 14 strategy briefing from L??«o Apotheker proving [to be] much more significant than the quarter's results," Cihra said. "We do not, however, think HP has the cash to make game-changing software buys as easily as many investors seem to assume."