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Enterprise Sales Not Enough to Keep HP Humming

By Rob Spiegel
Feb 23, 2011 2:42 PM PT

HP reported its fiscal first quarter results for 2011 on Tuesday, revealing a strong performance in earnings and income. Its net income was US$2.6 billion for its first fiscal quarter, up from $2.3 billion a year earlier. Overall revenue was $32.2 billion, up from $31.2 during last year's first quarter.

Enterprise Sales Not Enough to Keep HP Humming

The company's projections, however, jarred some nerves. HP forecast slower revenue growth than many analysts had predicted for this year, which sent shares down 12 percent during after-hours trading, and a further 11 percent Wednesday morning, dropping HP's market cap $11 billion.

HP pointed to a weakening consumer PC market and sluggish growth in information technology services, while noting the enterprise market remains strong.

For the current quarter, HP expects revenue to lie between $31.4 and $31.6 billion, a billion dollars off the $32.62 billion projection of research firm Factset. For the complete fiscal year of 2011, HP projects revenue to be between $130 and $131.5 billion, well under Factset's estimated $132.91 billion.

HP did not respond to the E-Commerce Times' request to comment for this story by press time.

Strong on Enterprise, Weak on Consumer

HP has succeeded in the enterprise market, especially given the fragile economy, but the company has failed to deliver with webOS, the mobile operating system it acquired with its purchase of Palm.

"HP is doing impressively well in servers, networking and especially printers, given that is a declining market," Rob Enderle, principal analyst at the Enderle Group, told the E-Commerce Times. "However, they are being defined by their consumer client business and they need to make the webOS effort a success. Their initial start isn't promising."

HP needs to step up its game in order to play on the same field with Apple, suggested Enderle.

"Apple is currently beating all takers largely because they provide a complete offering," he said. "They out-market every other vendor in the space, both in terms of budget and execution. As the chasing vendor, HP has to out-execute Apple, and currently they are falling short in everything from naming to time-to-market."

Changing Consumer Perception

At a minimum, HP needs to meet Apple in terms of product performance or it risks giving consumers the impression of a company that is inept by comparison, Enderle observed.

"And that comes while they're bleeding market share to Apple," he noted. "A very nervous new board may seek to take executive corrective action."

This situation could turn positive if HP finds a way to score with its webOS offerings, which would "do wonders for HP's valuation," said Enderle. "With folks increasingly focused on Steve Jobs' health rather than Apple's offerings, HP has the potential to spike revenues, profits and valuation. That would turn the perception of the executive team from failures into heroes."

HP will have to move quickly to regain the market credibility it's already shedding.

"There is time to repair the strategy, but that time is running out," said Enderle. "If they don't improve their execution -- at least with regard to consumer products -- the TouchPad could be more of a liability than an asset this year."

Has the PC Market Gone Soft?

HP reports earnings early, so this could be an ominous sign for the PC market. We could see similar weak projections from other PC makers in the coming weeks.

"It looks like HP's enterprise business is doing well, and most of the weakness is around selling PCs and, specifically, in the consumer space," said Al Hilwa, program director of applications development software at IDCs.

"HP reports a couple of months before most companies because of the way their fiscal year is aligned," Hilwa told the E-Commerce Times. "It could be that they are seeing trends earlier than others in PCs."

HP needs to flesh out its tablet ecosystem to keep up with the rapidly growing tablet market, he suggested.

"There are always product cycle issues in the fast-paced PC world, but the HP media tablet, if priced right, could help HP re-establish itself in the long run," said Hilwa. "I say the long run because there is lots of work to do to build out the ecosystem for webOS, including the apps portfolio, the content strategy, monetization schemes, etc. This market is moving even faster than the PC market."


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