February 23, 2011 7:50 pm

HP falls 12% after forecasts are cut

Shares in Hewlett-Packard dropped as much as 12 per cent in early trading on Wednesday following the company’s decision to slash its revenue forecast for its current fiscal year by $2bn late the day before.

For Léo Apotheker, who took over as chief executive four months ago, the sharp sell-off was a stark indication of the depth of the unease that has spread among HP investors.

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Far from being encouraged by signs of short-term improvements in profit margins, Wall Street focused on a more troubling prospect: that the wide-ranging technology conglomerate had cut too deeply into costs in the past, that this was starting to hamper its revenue growth, and that efforts to rebuild its competitiveness in markets ranging from tablet computers to services would dent profits in the future.

The sell-off came the day after HP also reported that revenue for the first complete quarter in which Mr Apotheker was at the helm had fallen short of its own forecast, as consumer PC sales slumped and it suffered an unexpected setback in the IT services business.

Mr Apotheker blamed the services shortfall on “glitches” in parts of its operations that he hoped would be fixed by an overhaul under way in its sales and marketing efforts. He also warned against reading too much into weakness in its consumer PC operations, which had been felt across the entire PC market in recent months.

“You need to take it a little bit in stride,” he told the Financial Times, as he issued a strong endorsement for HP’s broad-ranging strategy, which spans both consumer and business businesses.

While the consumer market may be weaker now, he said, a presence there was essential given the “consumerisation” of IT in recent years, which has seen consumer technology trends eventually influence corporate buying patterns.

In a hint that HP did not plan to play in all areas of the mass consumer business, though, he said that the “sweet spot” in the business on which he has set his sights is the market for “prosumers”, or professionally minded consumers.

Whether HP can position itself for these trends, and at what cost, are questions that are now playing on investors’ minds. Mark Hurd, who resigned as CEO last August, set the stage for the push deeper into services and new touchscreen computing devices, through the purchases of EDS and Palm; but it has fallen to Mr Apotheker to prove these acquisitions can enable HP to make up lost ground against rivals such as IBM and Apple.

To some observers, Wall Street’s knee-jerk reaction seemed excessive. “If I were in their shoes, I would be properly cautious,” said Frank Gillett, an analyst at Forrester. For HP investors, though, it will be a nervous wait until March 14, when Mr Apotheker has promised the first in-depth look into his plans for HP.

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