HP braces for huge loss

By Reuters | Updated: 9 August 2012 10:29 IST

Hewlett Packard Co warned of a mammoth quarterly loss after writing down $8 billion on the value of its services business, most of which it acquired four years ago with its $14 billion purchase of EDS.

The world's largest computer maker also plans to replace its head of services, a vast but sluggish division that new CEO Meg Whitman wants to reshape into a stronger competitor to the likes of IBM .

Whitman, the former eBay CEO who took up the computing giant's helm in 2011 to some skepticism about her technology and hardware credentials, is trying to turn around the company. HP's stock has lost more than half its value in the two years since CEO Mark Hurd unexpectedly resigned amid a scandal over his relationship with a female marketing contractor.

In a sign that Whitman's efforts to trim costs and bolster the company's prospects were succeeding, HP on Wednesday raised its quarterly outlook for profit, after excluding one-time items such as the goodwill writedown. It did not provide reasons.

HP's stock rose 2.4 percent to end at $19.41 after the increase in the company's outlook relieved investors, who had been expecting another bad quarter with global IT spending on the wane.

"Everybody was expecting them to miss the quarter. Now they said they are going to beat their forecast. That's why the stock is up," said Shaw Wu, an analyst with Sterne Agee.

But analysts cautioned that it is premature to say that HP's darkest days have passed, especially because the company did not explain why it raised its outlook for profit, excluding items.

"There are a lot of unanswered questions," said Stifel Nicolaus analyst Aaron Rakers. "It is hard for me to get too terribly positive on it."

HP said it decided to take the $8 billion non-cash charge in its fiscal third quarter ended July 31 following a review prompted by declines in its stock price, changing market conditions and the services division's financial performance.

"When indicators of potential impairment are identified, companies are required to conduct a review of the carrying amounts of goodwill and other long-lived assets to determine if an impairment exists," HP said in a statement.

Analysts said that charge confirmed what has long been widely known by investors: HP paid too much for EDS, one of the pioneers of the outsourcing of technology services.

The deal was unpopular on Wall Street from the day it was announced in May 2008 as critics questioned whether then-CEO Hurd was paying too dearly for a slow-growing company.

"Is this a huge write-off? Yes," said Global Equities Research analyst Trip Chowdhry. "Management is undoing the things that Hurd did - overpaying for something that is not right."

The company is scheduled to release quarterly earnings on August 22 after the closing bell.

HP also said that it had moved faster than it previously anticipated with plans announced in May to reduce 27,000 jobs, or 8 percent of its workforce. Because of this, it raised its estimate of a third-quarter pre-tax restructuring charge to as much as $1.7 billion from its previous estimate of $1 billion.

As a consequence of the impairment charge and the restructuring charge, HP said it expected to post a third-quarter loss of $4.31 to $4.49 per share.

Missing ingredient - revenue growth
HP, which employs more than 300,000 people globally, posted a 31 percent drop in second-quarter profit and a 3 percent decline in revenue.

Analysts said the company's long-term success depends on efforts to rejuvenate its products, such as developing goods that can compete with the likes of Apple Inc's iPads and phones that run on Google Inc's Android operating system.

"Write-offs don't do it," said Fred Hickey, editor of The High-Tech Strategist newsletter. "You need revenue growth."

Wall Street analysts expect HP's sales to fall 3.4 percent to $123 billion in its current fiscal year, according to Thomson Reuters I/B/E/S.

The company did not comment on its revenue outlook in its release on Wednesday.

Wu, the analyst with Sterne Agee, said it will be tough to get sales growing at a healthy clip, noting that about 30 percent of revenue comes from HP's ailing PC division and at least 20 percent from its sluggish printer business.

"They've got at least 50 percent of their company that's still under pressure. Restructuring doesn't help that out," Wu said. "They still have a lot to do."

HP said it now expects third-quarter earnings, excluding one-time items, of about $1.00 per share, compared with analysts' average estimate of 97 cents.

The company had previously forecast earnings of 94 cents to 97 cents per share.

Whitman, a Silicon Valley veteran who waged an unsuccessful bid for governor of California in 2010, has said she plans to use some of savings from the restructuring to develop new products, especially in printing and PCs.

HP said that it was replacing the head of its services business, John Visentin, who was named to the post a year ago by Leo Apotheker, Whitman's predecessor as CEO. Visentin, a former IBM executive, could not be reached for comment.

Senior Vice President Mike Nefkens was named Visentin's acting replacement. Nefkens is general manager of HP enterprise services in Europe, Middle East and Africa (EMEA).

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