Wednesday, May 18, 2011

Is Ex-CEO Mark Hurd To Blame for HP's Poor Outlook?

The outlook for Hewlett-Packard is causing a ripple in the stock market. HP revised its third-quarter and full fiscal year 2011 outlook based on anticipated impacts from the Japan earthquake and related events, as well as soft consumer PC sales and reduced operating profit margins for services. HP estimates about $31 billion in revenues for the third quarter and $129 billion to $130 billion for the full fiscal year.

The news caused Intel, Micron Technology, Nvidia, Advanced Micro Devices, and other technology Relevant Products/Services stocks to slip. Micron's stock fell 63 cents, or six percent, in midday trading. Intel shares slipped only 22 cents on the back of an announcement that it will meet its second-quarter estimates.

Hurd's Fault?

Charles King, principal analyst at Pund-IT Relevant Products/Services, called the drop a bloodbath quarter for new President and CEO Leo Apotheker, who replaced Mark Hurd after a sex scandal. King compared Apotheker's early tenure to a president coming into the White House. There's a grace period where disasters early on can easily be blamed on the previous administration and usually are.

"It's fascinating to me that during his time at HP Mark Hurd was seen by many as such a golden boy and such a brilliant operations executive in his ability to wring every bit of profit out of every incremental penny spent on product development," King said. "HP's results can clearly be tied to Hurd's aggressive cost-cutting and the way that he set up the company to compete."

Although HP performed well during Hurd's tenure, even surviving the worst part of the economic downturn and appearing to rebound as the first spurt of consumer optimism emerged in 2010, King said overweighting on consumer business and the thinness of HP's enterprise Relevant Products/Services product and service portfolio is starting to show. He added, "It doesn't give me a lot of optimism for what Hurd might be doing at Oracle, frankly."

A Bright Spot

In its second fiscal quarter, HP's net revenue was $31.6 billion, up three percent from a year ago. Results were largely driven by performance in the commercial sector as businesses continued to spend on technology. HP experienced uneven consumer performance across its product categories during the quarter, with continued softness in consumer PCs across all geographies.

"HP executed well and delivered a solid quarter," said Apotheker. "Our enterprise strategy, with services at its core, is focused on higher value-added solutions. Today we are accelerating our efforts to align our services business model to our long-term strategy to deliver unprecedented value to our customers and a better return for our shareholders."

Services revenue grew only two percent year over year with a 15.2 percent operating margin. To improve long-term performance, HP said it's accelerating alignment of the services business with the company's overall strategy, including making investments to drive more value-added solutions and migration to the cloud Relevant Products/Services.

"There was one bright point in particular. The networking sales were up quarter over quarter. That's good news," King said. "It's a relatively tiny amount of money. HP doesn't have that large a share of the networking space, but I do think it bears out the company's decision to focus on the area as a market opportunity."

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