Hewlett Packard stumbles on several fronts

May 18, 2011: 1:04 PM ET

Big firms like HP supposedly inhabit the safe, stable sector of tech. But everything from the Japanese earthquake to an uncertain mobile future has led CEO Leo Apotheker to a moment of reckoning.

Leo Apotheker (CEO of SAP)

HP CEO Leo Apotheker. Image by mkrigsman via Flickr

FORTUNE -- Last week, Cisco's troubles were made painfully apparent when the company announced there would be layoffs, likely in the thousands.

Then on Monday Bloomberg News got hold of a memo from Leo Apotheker, CEO of Cisco's (CSCO) rival HP (HPQ), telling 10 of his top executives that they need to control costs, to limit hiring and to gird their loins for "another tough quarter." The leak forced HP to issue its quarterlies on Tuesday, a day earlier than planned.

The numbers look OK; the outlook doesn't. Profits in the quarter ending April 30 were up 5% (better than expected) and revenues were up 3% (about what the company had forecast). But the company lowered its 2011 outlook. In the leaked memo, Apotheker told execs that the company "must watch every penny and minimize all hiring." Like Cisco then, HP is the latest big tech darling of the 90's to find itself on the outside, looking in at a revolution in mobile, cloud and social computing that has largely passed it by.

HP blames its worsening outlook on weak consumer demand for personal computers (though business PC demand is stronger than expected) and, mainly, trouble with its services business, which it is in the midst of restructuring.

Part of the problem is that the services unit has no chief. It also doesn't seem to have much of a strategy in place. In a conference call with analysts, Apotheker said it will take perhaps six months to get the services unit to sign customers on to higher-margin contracts for such products as cloud computing. (Side note: does this amount to a signal to services customers that they are about to be gouged?)

For this, Apotheker seemed to blame former CEO Mark Hurd, who left the company last August (Apotheker took over in November). "We talked strategy, we just failed to execute in the past," Apotheker told the Wall Street Journal on Tuesday.

And the company is also blaming the Japan earthquake, in part, for weakness in the consumer PC market -- sales are down in Japan, it said, and the quake had disrupted supply lines as well. The company also cited consumer demand for tablets eating into PC sales. The company is pinning its consumer hopes on its own forthcoming tablet product, the TouchPad, built on the WebOS platform. That product is due this summer.

Gleacher & Co. analyst Brian Marshall issued a note on Tuesday including this biting passage:  "Historically known for its consistent performance and operational excellence, Hewlett-Packard is now associated with more undesirable attributes (e.g., management changes, lowering of guidance, internal leaks, etc.)." Investors want "both consistency and lack of surprises from its portfolio companies," he continued. "Unfortunately, Hewlett-Packard is delivering neither" lately.

As for the future, Breakingviews' Chrisopher Swann concluded that, having issued its "grim forecast," the question now is "whether HP can move quickly enough from PCs and printers to tablets, mobile and the cloud."

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