HP disappoints, Dell shines
New York - Hewlett-Packard Co slashed its 2011 earnings forecast as it embarks on a spending spree to revamp a troubled division, while long-time foe Dell Inc delivered another blowout profit.
The twin leaders of the global PC industry - under siege from the growing popularity of powerful mobile gadgets like Apple Inc's iPad - are increasingly venturing into higher-margin services: helping corporations set up networks, servers and storage to engage the cloud.
HP CEO Leo Apotheker vowed to invest heavily on hiring and expanding its services division - everything from computer maintenance to consulting - to recover from "missed opportunities" under predecessor Mark Hurd.
But investors sent the stock tumbling more than 7%, fearful that costs - tightly controlled under Hurd - would balloon and shave points off already-pressured margins.
Dell, on the other hand, showed good progress on advancing margins to a better-than-anticipated 23% precisely by moving into higher-margin enterprise solutions and services. Its stock climbed 5%.
Dell has been in turnaround mode for more than a year and its efforts are now visible in the results.
"Dell was a company that was struggling and it's paid its dues in terms of investing," Shaw Wu, analyst with Sterne Agee said. "Now you're seeing the fruits of that labor."
"HP underspent, in services in particular, and they're suffering for it," he added.
HP trimmed its sales forecast for the second straight quarter. Dell, on the other hand, raised its operating income outlook for the year on improved profitability.
The latest revision to HP's outlook, the second since Apotheker took over seven months ago, raised questions about the former SAP CEO's ability to spark growth at the technology behemoth.
Several Wall Street investment houses, including Credit Suisse and Barclays, responded to the results by lowering their recommendations or price targets on the stock.
HP and Dell's results underscored the weakness in the global PC market, which is under siege from the growing popularity of mobile devices such as Apple Inc's iPad.
Consumer PC sales fall
HP's sales of PCs and other devices slid 5% in the second quarter. Consumer PC sales in particular dived 20% - greater than the company anticipated.
At Dell, demand for consumer PCs during the quarter fell short of its expectations, hurt partly by tablets, Dell Chief Financial Officer Brian Gladden said in an interview.
The sluggish industrywide consumer PC market plus the lingering supply impact of Japan's earthquake are expected to hurt HP more than Dell profits for the rest of the year.
Dell is less reliant on consumer PC sales and more focused on sales to corporations, which are replacing aging IT gear.
Apotheker, in turn, wants to boost earnings by pushing into sectors such as cloud computing, which for HP involves helping companies to revamp their data centers. Investors are looking for signs of progress on that strategy and the efforts to revamp its services unit.
"Clearly management credibility has taken a hit given that it just introduced its long-term outlook two months ago, with very little concern expressed for the long-term outlook on services," Brian Alexander, analyst with Raymond James Equity Research said in a note on HP.
"We do not have a high degree of confidence or visibility that the execution of these changes will be crisp," he said.
Apotheker indirectly blamed the services unit's problems on Hurd, who left the company in August after the company accused him of filing inaccurate expense reports.
HP acquired the division when it bought Electronic Data Systems in 2008 - a major initiative spearheaded by Hurd - adding services ranging from help-desk support for PCs to advising corporations on rebuilding data centers to take advantage of new cloud computing technologies.
Cloud computing refers to the use of Web-based servers to deliver services to large businesses and organizations.
HP may offset the spending on the services unit by keeping a tight control on costs elsewhere.
"We will manage our costs very prudently ..., including our salary costs," Apotheker said. "We want to create enough resources to expand our business."
The company is not planning any job cuts but will watch its headcount, he added.