HP Shares Plunge, CEO Vows ShakeupHP Shares Plunge, CEO Vows Shakeup

Shares of Hewlett-Packard were off as much as 10% Tuesday after the company reported tepid quarterly results and cut its outlook for profits and revenues for the current fiscal year. CEO Leo Apotheker pledged an immediate revamp of the company's $36 billion IT services unit, one of the chief culprits behind the disappointing forecast.

"We are not going to wait any longer," said Apotheker, during a conference call with reporters.

For its fiscal 2011 second quarter, ended April 30, HP said total revenue increased 3% year-over-year to $31.6 billion while net earnings, excluding items, rose 3% to $2.7 billion. Earnings per share came in at $1.24, ahead of analysts' expectations of $1.21.

HP released its earnings ahead of schedule following Monday's leak of a memo in which the CEO told managers he was expecting "a rough quarter."

The numbers weren't enough to allay concerns that HP is running out of steam in key areas, including commercial IT services and consumer PCs. The company cut its estimate for full-year revenue to between $129 and $130 billion, from between $130 and $131.5 billion. HP also said it now expects profits for the year to come in at $5 billion, down from its original estimate of between $5.2 and $5.28 billion.

HP officials blamed the downward revisions on weakness in the Asian market due to the Japanese tsunami, softness in the consumer PC sector, and its failure to move its services arm into higher-margin areas.

HP said consumer PC client revenues were off 23%, though commercial client revenues were up 13%. "The consumer PC market continues to be challenging," said Apotheker. Consumer PCs are taking a hit from Apple's iPad and other tablets, which have won over shoppers looking for lighter alternatives to traditional desktops and laptops. Apotheker said HP's response to the shift will come within weeks, when it launches its WebOS-based TouchPad this summer. "We are excited about WebOS."

Also troubling for HP is its inability to boost margins in its services business, which accounts for almost one-third of the company's total sales. HP has made little progress transitioning from commodity services like maintenance and repair to high-margin, strategic outsourcing and consulting engagements. It was a weakness that was supposed to have been addressed when HP acquired Electronic Data Systems in 2008 for $13.9 billion.

But Apotheker, in an implicit swipe at recent predecessor Mark Hurd, said HP did not invest sufficiently in new services capabilities after it completed the EDS deal, which came on Hurd's watch.

"Despite our stated intention to change our services business, there never was any measureable shift in our services mix over the past several years. We had over-executed operationally and under-invested strategically and it became clear we were missing opportunities," said Apotheker, echoing criticisms that Hurd focused too much on quarterly numbers and not enough on strategic planning.

Apotheker said HP needs to be a bigger player in strategic services, such as helping companies migrate their IT infrastructures to the cloud. "If you look at the revenue mix today compared to the past, nothing has really changed," he said. "That has to change because on the one hand HP is losing market opportunities by not being in the businesses we should have been in. On the other hand, we are slowly drifting toward low-growth, low-margin activities."

Apotheker said HP will invest more in strategic services going forward, strengthen its roster of consultants, and hire an executive VP who will run the unit as a direct report to the CEO. Executive VP Ann Livermore will oversee the business as part of her larger Enterprise portfolio in the interim.

HP shares were off 8.04%, to 36.60, in early afternoon trading Tuesday.

For Further Reading: HP's Next CEO Should Throw Back EDS