HP's Q1 Profit Jumps 16 Percent, But Weak Outlook In Consumer PC Business Spooks Investors

In HP's fiscal first quarter earnings call Tuesday, CEO Leo Apotheker delivered a mixed bag of results, with solid growth in key emerging business areas like networking and storage being countered by sluggishness in HP's services business and an uncertain consumer spending outlook.

HP had plenty of positive news to report for its fiscal Q1, which ended Jan. 31. HP's net income rose 16 percent year-over-year to $2.6 billion, or $1.17 a share, while revenue ticked up 4 percent to $32.3 billion. Excluding items, HP's earnings per share was $1.36, handily exceeding Wall Street analysts' expectation of $1.29 per share.

HP's enterprise storage, servers and networking (ESSN) division revenue rose 22 percent year-over-year, led by blade server revenue growth of 23 percent. HP CFO Cathie Lesjak said HP's enterprise switching and routing revenue grew 30 percent during the quarter, which she described as "a good proof point" that networking is contributing to HP's growth. Left unsaid was the possibility that this growth is coming at Cisco's expense.

Storage revenue was up 14 percent, and HP CEO Leo Apotheker said HP's integration of 3Par, which HP acquired last year after a bitterly contested tussle with Dell, is proceeding ahead of schedule. Other areas of revenue growth during the quarter were HP's Imaging and Printing Group (up 7 percent) and its Software division (up 5 percent).

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But while HP's commercial PC business revenue was up 11 percent, revenue from its consumer PC business dropped 12 percent, and the prospect of continued uncertainty in this area caused HP to issue a conservative forecast for Q2 and FY2011. Investors didn't much care for the news either, as HP's shares dove nearly 13 percent to $42.09 in after-hours trading Tuesday.

"We do remain cautious about the environment for consumer spending, especially around PCs," Apotheker said in a Q&A after the earnings call.

For its fiscal second quarter, HP forecast revenue of between $31.4 billion and $31.6 billion and earnings per share, excluding items, of $1.19 to $1.21. HP also chopped $2 billion from its full year fiscal 2011 outlook and now expects revenue of between $130 billion and $131.5 billion and earnings per share, excluding items, of $5.20 to $5.28.

Lesjak said HP's long-term services business looks solid, and was emphasized during Q1 by a $1.4 billion deal as well as a record number of deals exceeding $100 million. However, HP's Services division revenue fell 2 percent during the quarter due to a shortfall in the number of short-term business contracts, she acknowledged.

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During the Q&A, Apotheker was asked by several analysts about his plan for getting HP's services business back on track.

"We need to do a much better job in our high value added services, and it's apparent that we have some work to do," Apotheker said in the call. HP has re-organized its senior management and added new senior leadership in Services, and the company will continue to improve its internal processes in to improve its sales and delivery capabilities, he added.

"We have a significant opportunity in services," Apotheker said during the call. "In fact, when I meet with customers, they’re asking HP to increase our relationship with them, whether helping them to consolidate data centers, modernize their applications or transition to hybrid cloud environments."

HP isn't the only tech company to offer weak guidance this quarter: Earlier this month, Cisco shares plummeted 14 percent after the networking leader reported year-over-year declines in switching and routing revenues for its second quarter. At the time, HP Vice President Phil Walton seized the opportunity to paint this as a competitive win for HP and its converged infrastructure networking portfolio.

Despite HP's so-so Q1, Apotheker didn't shy away from highlighting HP's solid growth in switching and routing and suggested it's giving HP a leg up in what promises to be a vicious and protracted battle for the hearts and minds of customers. "We're winning in the data center," Apotheker said.