HP: Consumer PCs, IT services need more attention

Leaked memo prompts HP to move up its earnings announcement. But on a conference call, CEO Leo Apotheker strikes a more low-key tone, saying he's looking to make some changes in a couple of areas.

Lance Whitney Contributing Writer
Lance Whitney is a freelance technology writer and trainer and a former IT professional. He's written for Time, CNET, PCMag, and several other publications. He's the author of two tech books--one on Windows and another on LinkedIn.
Lance Whitney
3 min read

To prep for tough times ahead, Hewlett-Packard CEO Leo Apotheker recently sent an e-mail to his top executives warning them to cut back on expenses and curtail their hiring plans, according to The Wall Street Journal and other publications.

"We must watch every penny and minimize all hiring," Apotheker wrote in the e-mail, according to the Journal story published today. "We have absolutely no room for profitless revenue or any discretionary expenditures."

In a conference call this morning to announce its quarterly earnings, HP didn't directly mention the internal memo or any plans for drastic cuts. However, the company did make an indirect reference to the memo explaining it as the reason why it moved up its earnings announcement by a day.

HP eked out growth in sales and earnings for its fiscal second quarter but warned that its third quarter is likely to be difficult.

The tone of the conference call was more low-key than the one struck in the memo, but Apotheker and other key HP executives highlighted a couple of areas that they had already cited in February as ones that need more attention, namely consumer PCs and IT services.

Apotheker called the PC market bifurcated, pointing to the commercial PC market as strong, with the company's revenue growing in this area and meeting corporate demand. But he noted that the consumer PC market has continued to be challenging across the industry. In the second quarter, HP's consumer PC sales dropped more than 20 percent, higher than what the company had anticipated.

The CEO also called attention to HP's IT services business. Saying that HP had a strategy for supporting its IT services business, Apotheker explained that the company failed to follow that strategy, focusing on shorter-term margins at the expense of longer-term and more sustainable growth.

"In particular, we have not yet shifted our services mix to higher-value, higher-margin, and higher-growth categories," Apotheker said. "Our margins have expanded quickly and significantly, but our revenue has not grown as fast as it can our should."

As a result of the poor results in the IT services segment, the CEO said he's looking to make some immediate changes. Because of the value of the IT enterprise services unit, HP will hire an executive vice president in charge of this business, reporting directly to Apotheker. The company will also combine its technology services organization with its ESS (Enterprise Storage and Servers) organization. Apotheker also outlined a number of other goals.

"We will accelerate portfolio investment in higher value-added services. We will deepen industry content and form a business solutions group to create more strategic value for our customers. We will enhance our service offerings in emerging areas, such as cloud services and consulting."

Commenting on the lingering effects of the Japanese earthquake, HP said that it's been working around the clock on contingency plans to minimize the impact to partners and customers. But the company is expecting a temporary near-term impact to revenue and operating profits. Revenue is expected to decline as a result of reduced demand in Japan as well as supply chain constraints. Overall, the total impact of the devastation in Japan to HP will be $700 million, or 1 percent of total revenue, in the second half of the year.

The company did inject a note of anticipation and optimism over its upcoming Palm TouchPad tablet, saying that it's focusing on building out its WebOS ecosystem and working with third-party developers to make sure the product is done right. HP added that it's on track to ship its new tablet this summer as previously announced.