Seven Points To Ponder From HP's Q1 Earnings

HP had plenty of positives to talk about in its fiscal first quarter, but unexpected weakness in its consumer PC and services businesses caused analysts to pepper CEO Leo Apotheker and CFO Cathie Lesjak with pointed questions. While the executives tackled the key issues, some questions weren't fully addressed, and following are seven intriguing subtexts that arose during the event.

1. Little Crowing Over HP's Switching and Routing Growth

Earlier this month when Cisco reported quarterly sales declines in switching and routers, HP saw it as evidence that the dual vendor strategy was taking hold in the networking space. But after HP reported blade server revenue growth of 23 percent and switching and router growth of 30 percent in Q1, HP CFO Cathie Lesjak said only that this is "a good proof point" that networking is contributing to HP's growth.

CEO Leo Apotheker characterized HP's networking gains in similarly muted terms. "Our networking business continues to be an exciting opportunity. It's a big market. It has good margins and we expect to continue gaining share," Apotheker said during the earnings call.

Perhaps HP's weak consumer PC sales, sluggish services business and gimpy Q2 and full-year outlook put a crimp on any euphoria its networking gains might have generated. But HP could have seized an opportunity there to talk about the impact of its Catalyst For Change promotion, in which VARs receive up-front savings for swapping out Cisco networking gear for HP networking gear.

2. Apotheker Fields Baseball-Themed Question During Q&A

Apotheker, who only moved to California last October, could be forgiven for not being up to speed on baseball terminology. But when analyst Katy Huberty of Morgan Stanley asked Apotheker "what inning do you think we're in?" with regard to the commercial PC refresh cycle, Apotheker showed an impressive knowledge of the strike zone.

"We actually see a rather dynamic market. I would say that we are in the mid-innings, to use the American expression," Apotheker responded. It was the tech industry equivalent of fouling off a Tim Lincecum changeup in one's first at-bat.

3. Another Death Knell For Netbooks?

Lesjak attributed the softness in HP's consumer PC business, which saw a yearly revenue decline of 12 percent, to weak demand for netbooks, consumer desktops in the U.S. and notebooks in China. This will no doubt give fodder to those who believe Apple's iPad is doing its best termite impression on the overall consumer PC market.

What's especially interesting is that Apotheker didn't mention netbooks when laying out HP's plan to make its PC portfolio more attractive. "We look forward to providing a differentiated seamless experience across our tablets, smartphones, printers, PC’s and future phones," Apotheker said in the call.

As far as netbooks are concerned, one can almost hear the drums pounding as the iPad and other tablet cannibals move in for the final ceremonial devouring of the once-booming category. Microsoft acknowledged the impact tablets are having on netbooks in the software giant's earnings call last month, and HP's results are certain to stoke this line of speculation.

Next: Apotheker's Views On HP's Cloud Moves

4. Apotheker Downplays HP's March 14 Event

HP had plenty of positives to point to in Q1, but its weak outlook -- which included a chainsawing of $2 billion off its full year revenue target -- didn't go over well with investors. So it's fair to assume that financial analysts would be paying extra close attention to Apotheker's March 14 event in San Francisco to see in what direction he plans to steer HP.

However, while a discussion of HP's strategy is on the agenda, Apotheker made it clear that next month's event won't include the type of hard core strategic details that investors may be clamoring for in the wake of the Q1 report. "It’s not a meeting where we lay out long-term financial plan or guidance, it’s a discussion of where we see the market going, why HP’s uniquely positioned, how we expect to win," Apotheker said in the call.

5. Apotheker Bullish on HP's Cloud Computing Moves

In Q1, HP's short-term signings and project-based revenue fell short of expectations, but Apotheker sees data center consolidation and services that help customers transition to hybrid cloud environments as an important area of opportunity.

Apotheker touted the momentum of HP's Cloud Discovery workshops, a new service offering in which HP Cloud consultants teach partners and customers about cloud business models and best practices. Launched in Q1, these workshop have generated $250 million of pipeline, Apotheker said.

"We’ll continue to improve our higher value-added service offerings and ability to serve and delivery with long-term and short-term signings," Apotheker said in the call. "We have a real opportunity to drive more value to our customers and that's what we're focused on doing."

6. No Mention Of Outflanking Apple In 'Coolness'

Apotheker raised eyebrows last month by suggesting that HP, by paying more attention to product design, could overtake Apple for the unofficial title of the tech industry's "coolest" company in the eyes of consumers.

Weak consumer PC demand has probably put this vision on hold, but Apotheker said he's "very pleased" with the reception to HP's Feb. 9 unveiling of its webOS powered TouchPad tablet PC and its Pre3 and Veer smartphones, which are slated for launch in the second half of the year.

"We are all excited about our WebOS platform, the devices and that we announced and the incremental opportunity that WebOS provides. The enthusiasm and the anticipation for WebOS exceeds even our most optimistic expectations," Apotheker said in the call.

Next: HP's Rationale On Services Weakness

7. HP Says Services Shortfall Not A Big Deal

HP's Services division revenue fell 2 percent during the quarter due to a shortfall in the number of short-term business contracts. During the Q&A, Ben Reitzes of Barclays Capital asked HP executives to explain a services revenue shortfall that was, from his own calculation, between $600 and $700 million.

By way of response, Lesjak said that in Q1, HP's IT Outsourcing Services inked several long-term contracts in excess of $100 million, including several new customers. "These solid long-term signings are helping us to build what I would consider a foundation of solid annuity-based revenue. But the softness came in our short-term signings," Lesjak said in the call.

Lesjak also said the one percent decline in HP's technology services was due to the company's decision to "stop selling some low-margin third-party hardware." While this will help HP's business long term, it's now "generating a headwind of about 3 points of growth in the technology services," which means HP's technology services essentially grew during Q1.

"We do expect to have an improving position in services. For the year, we now expect services to grow low-single digits. And we expect the growth to ramp over the course of the year," Lesjak said.