Technology

HP CEO Expects 'Tough Third Quarter,' Memo Says


In a note that set off an after-hours share selloff on Monday, Hewlett-Packard Chief Executive Officer L?o Apotheker has told top executives to "watch every penny and minimize all hiring"

(Bloomberg) — Hewlett-Packard Co. Chief Executive Officer Léo Apotheker told top executives that he's bracing for "another tough quarter" in the July period and urged deputies to "watch every penny and minimize all hiring."

The company's existing headcount plans are "unaffordable given the pressures on our business," Apotheker wrote in the May 4 memo to deputies, including Todd Bradley, executive vice president of the personal systems business, and Chief Financial Officer Cathie Lesjak. The memo was obtained by Bloomberg.

"Q3 is going to be another tough quarter, one in which we will be driving hard for revenue and profit," Apotheker wrote. "We have absolutely no room for profitless revenue or any discretionary expenditures."

Apotheker's e-mail followed a February forecast for second-quarter sales and profit that missed analysts' estimates. Hewlett-Packard blamed the shortfall on sluggish demand for services and consumer products. The memo indicates that the company continues to come under pressure and suggests job cuts are in the offing.

"This is a continuation of what we've seen recently from HP—weakness on the top line, but better cost controls," said Brian Marshall, an analyst at Gleacher & Co. in San Francisco.

Hewlett-Packard, based in Palo Alto, California, dropped as much as 5.1 percent to $37.76 in extended trading yesterday. The shares had fallen 61 cents to $39.80 in regular New York Stock Exchange composite trading earlier in the day.

Earnings Predictions

Following news of the memo, Hewlett-Packard moved up its second-quarter earnings report to this morning, rather than the afternoon of May 18. According to a Bloomberg survey of analysts, the company is expected to report profit excluding certain costs of $1.21 a share on sales of $31.5 billion in the period, which ended in April.

Hewlett-Packard's disappointing forecast cast a pall over Apotheker's first quarter as CEO and underscored the dual challenges he faces. Hewlett-Packard's reliance on home-computer sales leaves the company vulnerable to a consumer slump, while its services unit needs acquisitions to take advantage of a shift to cloud computing.

The company is also shuffling its executive ranks. It hired Martin Homlish as chief marketing officer April 19. Homlish had overlapped with Apotheker at SAP AG, where Apotheker was CEO from 2009 until his ouster last February. The previous day, HP named Jan Zadak as head of business computing sales, replacing Tom Hogan, who is departing.

Pursuing Profit

Apotheker is stepping up the company's emphasis on higher-margin businesses, including servers, storage computers and software, and lessening its dependence on PCs, said Marshall, who has a "buy" recommendation on Hewlett-Packard.

Executives led by Lesjak and Tracy Keogh, executive vice president of human resources, are "driving a full headcount re-planning process" aimed at reflecting "the new realities of the market and our position," Apotheker wrote. The company had 324,600 employees as of Oct. 31, a company filing shows.

Apotheker, who took over Nov. 1, outlined his strategy for the first time on March 14, announcing a deeper push into software and the expanding market for computing delivered via the Web. The company is starting a cloud-computing service that will let developers create applications for consumers and businesses that run on HP servers, Apotheker said at the time.

Hewlett-Packard also plans to put its WebOS mobile software onto a broader range of products, ramping up output to more than 100 million devices a year, he said. And the company announced a 50 percent increase in its dividend.

Hewlett-Packard's headcount surged after the August 2008 $13.9 billion acquisition of Electronic Data Systems. Its employee ranks jumped to 321,000 in October 2008, up 87 percent from 172,000 the previous year.

Ricadela is a technology editor for Bloomberg Businessweek.com in San Francisco. Saitto is a reporter for Bloomberg News.

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