HP's 2Q offers hope even as revenue slump deepens

By MICHAEL LIEDTKE,AP Technology Writer Updated at 2013-05-23 04:29:14 +0000


SAN FRANCISCO (AP) — Hewlett-Packard is still scrambling to meet the growing demand for more versatile and less expensive mobile devices as a slump in its personal computer sales deepens, but the company's cost-cutting measures and focus on more profitable areas of technology appear to be easing the pain.

The conflicting signs of further deterioration and potential recovery emerged in Hewlett-Packard Co.'s latest quarterly report released Wednesday.

Even as HP's revenue declined at the fastest rate yet in a nearly two-year slump, the company delivered fiscal second-quarter earnings that topped the estimates of both its own management and the analysts who influence investor perceptions.

"The results were better than feared," said Edward Jones analyst Bill Kreher.

HP provided Wall Street with another encouraging sign by predicting its earnings for the current quarter will top analyst projections. The Palo Alto, Calif., company also raised its earnings forecast for the full year, another sign that management is confident that HP's profits won't fall as dramatically as many investors feared while the PC market crumbles.

"You can feel the turnaround taking hold at HP," CEO Meg Whitman told analysts during a Wednesday conference call.

Investors evidently saw enough progress to believe HP is finally heading in the right direction. The company's stock soared $2.84, or more than 13 percent, to $24.07 in extended trading. If the shares move similarly in Thursday's regular session, it would be the biggest one-day percentage gain in HP's stock in more than four years. Even so, HP's stock would remain nearly 50 percent below where it stood just three years ago.

Since then, consumers and corporate customers have been gravitating toward smartphones and tablet computers equipped with touch screens and voice recognition technology. As these mobile devices add more features and grow increasingly powerful, their prices are falling, too, making them even more attractive compared with the laptop and desktop computers that HP makes.

Like many other PC manufacturers, HP was slow to respond to the shift and then stumbled trying to catch up with Apple and other manufacturers, such as Samsung Electronics, that make devices running Google Inc.'s Android operating system.

Those missteps are still haunting HP, as illustrated in its latest quarter. The results included the seventh consecutive decline in HP's quarterly revenue compared with the same period the previous year. HP's 10 percent decrease in revenue during the three months ending in April was the largest drop so far during the downturn.

Most of the erosion has occurred under the leadership of Whitman, a former CEO at eBay Inc. and defeated California gubernatorial candidate, who was hired to run HP in September 2011.

As she has repeatedly warned, Whitman emphasized HP remains on a "multi-year journey" as she cuts costs, overhauls the company's product line and pushes into more profitable niches in business software, data analysis and storage and technology consulting.

Revenue shrank in all those areas too during the second quarter, but not as severely as the PC contraction.

Whitman suggested HP's revenue could start rising again in the next fiscal year ending in October 2014, though she said the company still has a lot of work to do to make that happen.

"We have to do a better job managing the transition from the technologies that power the past to the ones that will power the future," Whitman said.

To gain some financial stability during the upheaval, HP is in the process of eliminating nearly 30,000 jobs and shedding other expenses to help offset its waning revenue. Through April, HP had jettisoned about 18,800 workers during the past year.

That's the main reason that HP's earnings are holding up better than Wall Street anticipated, Edward Jones' Kreher said.

HP earned $1.1 billion, or 55 cents per share, during its most recently completed quarter. That was down 32 percent from $1.6 billion, or 80 cents per share, last year.

If not for certain items unrelated to its ongoing business, the company would have earned 87 cents per share in its fiscal second quarter. That figure topped the average estimate of 81 cents per share among analysts surveyed by FactSet.

HP's revenue totaled $27.6 billion — about $400 million below analyst projections.

HP's biggest problems are rooted in its personal computer business. Revenue in that division plunged by 20 percent from last year.

In comparison, rival Dell Inc.'s PC sales declined by 9 percent during the same period. By Dell's own admission, the company aggressively slashed its PC prices to prod reluctant consumers and corporate customers into buying laptop and desktop machines.

HP also is lowering PC prices, but not as dramatically as Dell, according to Cathie Lesjak, the company's chief financial officer.

"We are focused on profitable growth," Lesjak said in an interview. "We will walk away from deals that really throw us into a loss and don't generate good value for HP."

Dell is in the process of trying to gain shareholder approval to sell itself to its CEO, Michael Dell, and a group of investors for $24.4 billion.

Whitman believes HP can bounce back by inventing new technologies and packing them into appealing products more quickly, recapturing the spirit the company established as a Silicon Valley pioneer nearly 75 years ago.

HP's first foray into tablet computers and smartphones designed for the Palm operating system flopped two years ago. The company is now selling tablets running on Android and a recently introduced version of Windows, but it hasn't re-entered the smartphone market yet.

The effectiveness of Whitman's strategy is likely to be tested during the next few months as HP releases another wave of PCs that have touch screens and tablets in different sizes. HP is lowering the prices on its upcoming touch-screen PCs in an effort to lure more consumers.

All the new devices are expected to be on the market in time for the back-to-school season.

Copyright 2013 The Associated Press.