H-P Dashes Hopes That Rebound Is Nigh

The IT spending slowdown continues to cast a big shadow over H-P
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Updated from 11:53 a.m. EDT

Shares of

Hewlett-Packard

(HPQ) - Get Report

took a hit following the firm's

second-quarter earnings report

, as investors responded to the company's profit plunge.

The company's stock slipped $1.84, or 5%, to $34.74, while the Nasdaq rose 0.1%.

Despite meeting analysts' revenue and profit

estimates

, H-P announced job cuts and offered little

clarity

on the state of the PC market.

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Underlining the challenges still posed by the economy, H-P's profit slipped 17% year over year to $1.7 billion, and the firm's revenue dipped 3% to $27.4 billion.

During a conference call late Tuesday, H-P CEO Mark Hurd said that his company is "executing well," but he was unwilling to predict when things will improve.

"I think we're going to need another quarter of data to make a meaningful statement about a turnaround or anything like that," he said, in response to an analyst's question.

Seen as one of the tech firms best equipped to

withstand

the recession, H-P enjoyed a strong performance in services, but its critical PC business was something of a mixed bag.

H-P's Personal Systems Group posted flat unit shipments, but revenue fell 19% to $8.2 billion. Notebook revenue for the quarter was down 13%, while desktop revenue declined 24%.

PC sales represent more than a quarter of the tech giant's overall sales, and there had been

hopes

that H-P would shed some light on a possible

rebound

in the computer market.

Intel

(INTC) - Get Report

CEO Paul Otellini, for example, recently stated that the PC market

"bottomed out"

during the first quarter, and is returning to normal seasonal patterns.

H-P's results, however, suggest that PC suppliers are wrestling with falling prices and the impact of low-cost netbooks, although the Palo Alto, Calif.-based firm said that it gained PC market supremacy in each global region.

In another clear sign that clouds are still hanging over the tech sector, H-P announced plans to cut 2% of its workforce, which is around 6,400 people. The latest headcount reduction, which follows 25,000 layoffs announced by the company last September, will take place during the next 12 months.

The company expects that its latest round of layoffs and a push to consolidate real estate will generate annual savings of $500 million starting in 2012.

Hurd was also questioned about the changing competitive landscape during last night's conference call. With

Cisco

(CSCO) - Get Report

now in the

server business

, H-P also faces a fresh challenge from

Oracle

(ORCL) - Get Report

, which recently

bought

Sun Microsystems

(JAVA)

.

"Oracle is a strong partner of H-P, and we obviously do a lot of stuff together," said Hurd, referring to the firms' joint Exadata product. "We think we have a very strong partnership, and we expect that to continue."

Although H-P executives made no reference to Cisco, they did name the recently launched

Matrix

system, which is a direct competitor to Cisco's

Unified Computing System

.

Goldman Sachs analyst David Bailey feels that H-P offers good opportunities for investors.

"We continue to think investors should buy H-P shares because of the company's ability to meet or beat earnings expectations in a weak environment and the leverage that is being added to the model that will drive upside once demand begins to improve," he wrote, in a note released Wednesday.

Despite a soft IT spending environment, Bailey still likes what he sees. "Profitability improvement in services, software, and printers, as well as incremental cost cuts ($500M from real estate and a 2% headcount reduction) should yield some upside in FY09," he added.