Update: HP reports revenue and profit up in Q2, but lowers forecasts

Hewlett-Packard reported a small year-on-year increase in revenue and profit for the three months ended April 30, but lowered its forecast for its full fiscal year.

The company announced the results early Tuesday, a day earlier than previously planned, after the leak of an internal memo from CEO Léo Apotheker to senior managers asking them to reduce spending for the rest of the year.

The reason for that policy became clear on Tuesday, as HP cut its forecasts for the rest of its fiscal year. The effects of the earthquake in Japan on the supply chain, continued slow demand for PCs, and expectations of lower profit from services all contributed to HP's gloom, the company said. It now expects revenue of between $129 billion and $130 billion for its full fiscal year, where it had previously forecast revenue of between $130 billion and $131.5 billion. It also lowered its forecast for earnings per share, saying it could now be as low as $4.27, where it had previously said it would be in the range $4.46 to $4.54.

In its second fiscal quarter, however, HP reported net profit of $2.3 billion on revenue of $31.6 billion, up from a net profit of $2.2 billion and revenue of $30.8 billion a year earlier. Earnings per share rose 15% year-on-year to $1.05.

The company's Personal Systems Group contributed the largest share of the revenue, $9.4 billion, down from $10 billion a year earlier, although operating profit in the group rose to $533 million from $456 million a year earlier.

HP's services revenue rose a little, to $9 billion from $8.8 billion a year earlier, but operating profit there slipped slightly to $1.36 billion from $1.4 billion a year earlier. The company warned that lower profitability in services would hurt its full-year results.

HP's Imaging and Printing Group took in $6.7 billion, up from $6.4 billion a year earlier, generating $1.14 billion in operating profit, up from $1.1 billion a year earlier.

Software revenue rose to $764 million, from $653 million a year earlier, although operating profit in the group slipped a little, to $154 million from $167 million a year earlier.

Those numbers don't tell the whole story about HP's software business, Apotheker said in a conference call with analysts.

"You should measure the software business by the growth in licenses, and there we grew by 29%," he said.

While HP's software business is growing organically, that's not enough to satisfy Apotheker's ambitions for this sector.

"We are considering acquisitions in areas where we want to go faster, such as software," he said, adding that HP will retain its "prudent approach to mergers and acquisitions."

The company is on track to launch its TouchPad tablet PC "this summer," Apotheker said, insisting that it's important that the company continue to produce a full range of products, from phones, tablets and laptops all the way up to servers, to take advantage of a trend towards increasing connectivity between devices.

"We see a world where technology is changing, and significant market opportunities are being created," he said.

The services business is one area where HP needs to seize those opportunities. CFO Cathie Lesjak blamed the poor outlook in services on the company's current over-reliance on low-margin business process outsourcing.

"We have not been ramping up our value-added application services business fast enough," she said, "We need to enhance our portfolio in higher-value businesses."

HP is looking at investing in security and cloud management services as one way to increase profitability, and is also increasing the number of staff available to work on value-added services.

Investment in those moves will, however, drag the service group's profitability down in the short term, Lesjak said.

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