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HP's 2013 outlook disappoints, as company continues turnaround effort

HP's 2013 outlook disappoints, as company continues turnaround effort

By Reuters | Updated: 4 October 2012 10:29 IST

Hewlett-Packard Co's shares plunged to a nine-year low on Wednesday after Chief Executive Meg Whitman warned of an unexpectedly steep earnings slide in 2013, with revenue set to fall in every business division except software.

Wall Street had hoped for quicker signs of progress on Whitman's turnaround plan, which centers on transforming the former industry powerhouse into an enterprise computing corporation that can take on IBM and Dell Inc.

Whitman, who took the helm of HP just over a year ago after a failed bid to become governor of California, told investors that the company's recovery would start to become visible only in fiscal 2014, when investments begin to pay off.

She blamed unprecedented executive turnover in past years for dragging out the Silicon Valley company's turnaround.

Analysts say HP is struggling to shore up its credibility on Wall Street while battling crumbling margins in an increasingly cut-throat PC arena, tapering-off of IT spending, and an internal organizational overhaul that involves thousands of layoffs.

"I was surprised that nothing new was really said in terms of strategy, and the problem here is there is lack of investor confidence in the current strategy," said Shaw Wu, an analyst with Sterne Agee.

Shares of HP, the largest U.S. technology company by sales, tumbled 13 percent on Wednesday in the biggest single-day decline since August 2011.

Shares of some of HP's contract makers in Asia also fell when trading opened there on Thursday.

HP gave a particularly gloomy outlook for enterprise services, its business providing services to corporations and a key component of Whitman's rescue plan.

Revenue from that division will dive 11 to 13 percent in fiscal 2013 and be barely profitable, with operating margins of zero to 3 percent. That stands in stark contrast to IBM, which raised its full-year earnings outlook, reflecting its ability to manage costs, despite flat software revenue in the second quarter and a 2 percent decline in services.

Whitman became HP's third CEO in as many years after taking over following Leo Apotheker's abrupt dismissal just over one year ago. She is trying to revitalize the former industry icon via layoffs, cost cutting, and expansion into areas with longer-term potential such as enterprise computing services.

"The single biggest challenge facing Hewlett-Packard has been changes in CEOs and executive leadership, which has caused multiple inconsistent strategic choices, and frankly some significant executional miscues," Whitman told the investor conference in San Francisco.

"This is important because as a result it is going to take longer to right this ship than any of us would like," she added.

HP has lost more than two-thirds of its value since 2010, when its capitalization topped out at about $104.5 billion. Squeezed by crumbling demand for personal computers in a mobile era, significant leadership turbulence, and the advent of Apple Inc's iPad that year, HP's stock embarked on a steady decline. The company now has a market value around $30 billion.

Since Whitman took the helm in September 2011, the stock has fallen about 35 percent.

Musical chairs
HP has suffered through years of turbulence. Apotheker's 11-month tenure was marked by an acceleration of departures from various divisions, such as networking chief Marius Haas, as he brought in former coworkers from SAP AG.

Apotheker's predecessor, Mark Hurd, who is now president of Oracle Corp, also departed abruptly, after a sexual harassment scandal.

HP, like rival Dell, is trying to transform itself into a major enterprise computing provider in the mold of IBM, while slashing expenses to boost the bottom line. Shares of Dell, the No. 2 U.S. PC maker after HP, fell 4.7 percent on Wednesday, mired near nine-year lows.

HP is laying off 29,000 employees over the next two years and has written off $10.8 billion mostly related to the writedown of its EDS services business. Meantime, its business continues to be hit by a slowing in corporate spending and personal computer demand worldwide.

For 2013, the company forecast overall earnings, excluding restructuring charges and other items, at between $3.40 to $3.60 a share in fiscal 2013. That's well below the average forecast by Wall Street analyst of $4.18, according to Thomson Reuters I/B/E/S.

A large part of the shortfall rests on the projected plunge in enterprise revenue, a division that sells myriad services to businesses and has seen an erosion in profitability.

Operating profit fell 22 percent in the July quarter, surpassed only by a 28 percent slump in personal computers.

Mike Nefkens, HP's acting global enterprise leader ,said fiscal 2013 "will be a fix and build year."

"We expect long-term growth to be back in the 3-5 percent range and long-term profit to be in the 7-9 percent range," he said.

The heads of other business units also addressed Wednesday's conference, touting both new products and challenges facing the groups.

HP is battling formidable rivals on several fronts, particularly in cloud, or remote computing, products and services, with Oracle and IBM aggressively courting corporate customers.

China's Lenovo Group Ltd may overtake HP as the world's biggest PC seller this year.

"Asian brands will continue to outperform western brands," said Angela Hsiang, a Taiwan-based analyst at KGI Securities. "Western brands in general are lagging their Asian peers in terms of grabbing market share in fast-growing emerging markets."

Reflecting that brighter outlook, Lenovo shares were not badly hit by HP's profit warning, falling less than 1 percent. But Taiwan's Quanta Computer Inc and Compal Electronics Inc, both contract makers for HP, suffered more, with their shares dropping around 4 percent in Taipei.

Whitman vowed to reduce the number of product offerings and to cut costs as HP tries to recover in a worsening macro-economic environment. She has said it will take five years for the turnaround to be effective.

"All of this is fixable but it is going to take some time," she said.

She said HP eventually will have to compete in the smartphone market, but stopped short of laying out a plan and said there were no plans to introduce a smartphone in 2013.

Longer term, HP expects "to be a GDP-like growth company with key pockets of higher growth," said Cathie Lesjak, HP's chief financial officer.

Its stock closed down 13 percent at $14.91 on the New York Stock Exchange.

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