Last updated: May 17, 2011 7:04 pm

HP shares hit by profit alert amid overhaul

Hewlett-Packard shares dropped to their lowest level in almost two years after the top computer maker by sales cut its profit forecast on weak consumer demand and planned changes in its services unit.

As it released second-quarter earnings early on Tuesday, HP said it had been surprised by the depth of a 23 per cent fall-off in consumer PC revenue, which will make it more dependent on its forthcoming entrance to the tablet market, albeit late, with the TouchPad.

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HP meanwhile saw a 12 per cent rise in PC sales to businesses, which provide the bulk of its revenue.

Though the company met overall expectations for the fiscal second quarter that has just ended, investors were caught off guard by chief executive Léo Apotheker’s plan to invest more in pursuit of higher-value services business at the expense of profitability.

Shaw Wu, analyst at Sterne Agee, said: “They are doing quite well already from a profitability standpoint. It’s debatable whether it even makes sense to chase after higher growth if it hurts margins ... Investor confidence is clearly shaken.”

Mr Apotheker told the Financial Times that the shift toward consulting on cloud computing and applications should have been undertaken by Mark Hurd, his predecessor who was ousted last year.

“Prudent management is about anticipating the future and not waiting for the future to happen to you,” Mr Apotheker said, citing “a massive shift in the underlying trends”.

“A few additional quarters could have been up to expectations, but subsequently it would have fallen off the cliff,” he said. “You want a long-term valuable business.”

Profit margins at the services business should fall from 15.2 per cent in the second quarter to 13.5-14 per cent in the third quarter as a result of the overhaul.

Keeping its previous revenue estimate for the rest of the year almost intact, HP told investors they should expect profit of “more than $5” a share, instead of the $5.24 previously indicated. The Japan disaster should reduce revenue by $700m. In the quarter, HP revenue rose 3 per cent to $31.6bn, ahead of projections, aided by currency effects.

The Palo Alto, California-based company said that the effects of the Japanese earthquake would cost it $700m in the second half of the year, including lower customer demand and an increased cost of finding computer and printer manufacturing supplies. The company would, for example, have to pay more to bring parts in by air freight rather than by ship, as they raced to make up for lost time in factory production.

On Monday, Paulson & Co, the hedge fund founded by John Paulson which has
$36bn under management, revealed it had bought 25m shares valued at about $1bn. Paulson has said its strategy is to make money on companies undergoing restructuring, reorganisation and bankruptcy.

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