HP Reports Steep Consumer PC Sales Slide

That was the big takeaway from HP's second fiscal quarter results ended April 30, which were delivered Tuesday morning after a memo from HP CEO Leo Apotheker surfaced in which he advised his top lieutenants to cut back expenses and slow hiring. That sent HP shares tumbling $2 last night to $37.80 in after-hours trading.

Overall, HP posted non-GAAP diluted earnings per share of $1.24 on a 3 percent increase in sales to $31.6 billion. That compared with analyst estimates of $1.21 per share on sales of $31.53 billion, according to analysts polled by Thomson Reuters.

But HP's consumer PC client sales dropped 23 percent in the quarter compared to the year-ago period. "The steepness of our Q2 decline is greater than we anticipated," said Apotheker.

HP said it experienced "uneven consumer performance across its product categories during the quarter with continued softness in consumer PCs across all geographies."

This comes as the company's commercial PC sales increased 13 percent. Overall, HP's Personal Systems Group sales declined 5 percent.

At the same time, the company's Enterprise Servers, Storage and Networking sales were up 15 percent compared to the same period a year ago, with a 13.8 percent operating margin. HP said it is gaining share in the networking business with its routing and switching business growing at double digits during the quarter.

Apotheker said overall HP "executed well and delivered a solid quarter." He praised the company's "enterprise strategy with services at its core," focused on "higher value-added solutions."

Apotheker also signaled changes ahead, saying that "today we are accelerating our efforts to align our services business model to our long-term strategy." As part of that effort, HP is combining its Technology Services Group with its successful Enterprise Servers, Storage and Networking business. HP is also searching for an executive vice president of services who will report directly to Apotheker.

The services investment, HP said, is aimed at improving "long-term performance" and "accelerating alignment of the services business with the company’s overall strategy." HP's services sales were up a slim 2 percent in the quarter, with a 15.2 percent operating margin.

HP also revised its outlook for the current quarter and the full year fiscal 2011, reflecting what it called "an expected near-term impact from the Japan earthquake and related events, continued softness in sales of consumer PCs, and reduced operating profit expectations for services."

For the third quarter of fiscal 2011, HP estimates revenue of approximately $31.1 billion to $31.3 billion, GAAP diluted earnings per share of approximately 90 cents and non-GAAP diluted earnings per share of approximately $1.08.

HP said the third quarter fiscal 2011 non-GAAP diluted earnings per share estimates exclude after-tax costs of approximately 18 cents, related primarily to the amortization of purchased intangibles, restructuring charges and acquisition-related charges.

HP said it expects full year fiscal 2011 revenue in the range of $129 billion to $130 billion, GAAP diluted earnings per share of at least $4.27, and non-GAAP diluted earnings per share of at least $5.00.

HP said full year fiscal 2011 non-GAAP diluted earnings per share estimates exclude after-tax costs of approximately 73 cents per share.