Arik Hesseldahl

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HP’s Whitman: “We Are in the Early Stages of What We Hope to Achieve Here”

So the news is out. HP will cut about 27,000 jobs over the next two years or so.

I’m joining HP’s conference call a little late — there was a lot of news to get through in the press releases and regulatory filings. As I’m typing, CFO Cathie Lesjak is running through the financial results. But the all-important Q&A with analysts is still ahead.

1:54 pm: Lesjak is talking about the results in the personal systems group. Consumer revenues declined 4 percent, while commercial sales of PCs increased 3 percent.

Services delivered 11.4 percent of sales, which was down. IT outsourcing revenue was down 3 percent as “we are being more selective in the deals we pursue.”

Technology Services revenue was flat. Imaging and printing revenue was down 10 percent and supplies revenue was down 12 percent.

Business Critical systems are down 23 percent year over year. Business continues to be impacted by continued revenue decline. That’s the Itanium lawsuit with Oracle hurting HP again.

Software revenue grew 22 percent to $907 million. Still too small to have a significant impact.

2:00 pm: Lead generation we are seeing across HP for Autonomy, but the company seems to be having a harder time closing deals on time.

Now on to the balance sheet: Our focus is to rebuild the balance sheet this year. We returned $350 million to shareholders via share repurchases. We also paid $251 million in dividend. $2.5 billion in operating cash flow and free cash flow of $1.5 billion. Total cash was $8.7 billion.

Lesjak is still speaking. She’s now getting into details on the restructuring. 9,000 employees will exit the company this year.

That amounts to about one third of the cuts to come this year.

We will be investing in technology and business processes. We expect to invest savings from headcount and non-headcount actions in a lot of things like cloud, software and services.

Non-GAAP fiscal EPS to be $4.05 to $4.10.

2:05 pm: Expect cash impact to be about $400 million in fiscal. Hm. This is interesting. HP is writing-down the value of the Compaq trade name it acquired in 2002. Does this mean the end of Compaq as a brand?

Here’s the Q&A. First from Katy Huberty of Morgan Stanley: Regarding free cash flow, the second quarter numbers were strong. Where do you expect free cash flow to end this year?

Lesjak: We haven’t been guiding cash flow. The way to think about it long term is that it trends in line with non-GAAP earnings. In Fiscal 2012 we expect $400 million and through 2014 we expect it to be $2.7 billion.

Huberty: Do you have a view yet if share gains in PCs were “sell out” or “sell in” after hard drive shortages?

Meg Whitman: We saw a good sell out in channel inventory. We feel pretty good in demand. We’ve struck the balance between design and the workhorse design that companies and governments need.

Bill Shope of Goldman Sachs: Can we return to mid-teens margins in IPG?

Whitman: We expect about 2 billion pages that will move from analog to digital. People at home are printing fewer photos, but we feel good about printing in the enterprise. As an industry leader we need to step up and act like one. We need to get pricing correct on ink and printers, and get the right product at the right time. In the enterprise we missed a cycle on multifunction color printers. And we have to look at business models in emerging markets. If you price the printer a little higher and the ink a little lower, you can sell a lot more printers and print a lot more pages. I think we’ve got the past four years really clear now.

Lesjak: On supplies decline. The vast majority of the decline was due to channel inventories this quarter. We expect that to modulate going into Q3. The caveat is that demand continued to be fairly weak. We’d like to take the inventories down a little in Q3.

Shope: Question on margins.

Lesjak: Go back to what drove the margins. One was supplies mix. This was caused by channel inventory corrections, but also softer demand and lower margins. Finally something we are not calling for a change, its the strength of the yen in our Laserjet business.

Whitman: Joining forces of IPG and PC business is going very well. PSG had a broader footprint in emerging markets. We’re going to leverage that. These were different divisions that didn’t coordinate as well as they could have.

2:13 pm: Toni Sacconaghi from Sanford Bernstein: I know you stated several times that you expect savings to be reinvested. If we take that literally and say 40 percent will drop to the bottom line, is that the right framework we should be thinking about? Is that the envisions balance given that you used the adjective majority?

Whitman: We have a well defined amount we’re going to get from headcount reductions. But there are other things: We are not to the point where we can make a decision about how much of that we can reinvest. We want to take a disciplined approach and evaluate return on invested capital. For example, we may get a lot of these savings. We’re only going to reinvest on those opportunities that make sense for HP long term. We’ll give more guidance on this at the end of Quarters Three and Four.

Toni: Your guidance. Even if you strip out the initial 5-10 cents from the guidance, it still implies a 30 percent Q3 to Q4 EPS growth, which is unprecedented. He’s basically trying to calibrate EPS expectations given the cuts.

Lesjak: The math we’ve done is that Q4 is in line with normal seasonality. We’re feeling like this is consistent with normal seasonality.

Toni: What are the offsetting forces?

Whitman: Overall we feel cautiously optimistic coming out of Q2. But we haven’t turned the corner. We are in the early stages of what we hope to achieve in the next few years.

We are in the early stages of a turnaround. They’re not linear. There may be a setback. And then we’re going through a lot of changes here. IPG and PSG are joined. There’s a lot of moving parts, but I don’t want to get out over my skis in terms of what we can deliver.

Lesjak is now talking about currencies. At the end of the day the currency we’re looking at right now is a headwind.

2:19 pm: Shannon Cross from Cross Research: Provide more color on how you are thinking of restructuring. Cuts across the board? Will there be any divestitures? More investments in back-office systems?

Whitman: Our restructuring is about three things. Align cost structure with the portfolio, (missed one thing), and then streamline operating model. Basically say, what do we want to focus on, how many people do we need to deliver. We came up with a bottoms-up approach to the cost savings we can achieve.

Then we have to make investments in the business. That includes back office tools and processes. We combined sales under John Hinshaw. We’ve put tools in. Once we do that you’ll see this company be a lot easier place to work.

Cross is asking about Autonomy. As we reported earlier: Mike Lynch is out.

Whitman: Autonomy delivered disappointing results. It’s not the product and its not competition. This is classic entrepreneurial company scaling issues. When you see a company scale like that it’s a whole different ball game. We need a new organizational structure to support a $1 billion+ company. This is something I’ve done before, having scaled eBay from $4 million to $8 billion, I’ve seen this movie before. I feel good about the product. I feel good about big data and analytics and it will hit all our business units.

2:23 pm: Brian Marshall of ISI: He’s asking about savings from cuts and how they will be reinvested. His question is breaking up a little in my audio.

Whitman: We’re looking toward organic innovation. We don’t see any major acquisitions on the horizon. There may be some tuck-in deals. The heritage of HP is a fantastic engineering culture.

We are going to increase the Research and Development budget considerably. We’re going to invest in product quality. We have good quality, but I think we can do better. And we’ve got some investment in internal systems.

Lesjak: We expect to save on an annualized run rate of $3 billion. It is from that pool of savings that we’ll be looking for reinvestment. That vast majority will be reinvested back into the business in places where we can grow.

2:27 pm: Question from Keith Bachman of BMO: First on services. You’ve ID’d that you want to take a number of people yet at the same time, there are areas in services especially where you need to nurture. How do you see headcount there?

Lesjak: What we’re doing is having a transition. It’s going from heavily weighted in slower growth to faster growing higher margin services. Cloud. Security, information management and analytics, and application modernization. As we do that, it has headcount implications. We’ve modeled that out a few years. I think it’s also important that this is a mix. But it’s not just about mix, including lean methodologies, so we get a better rate basis on contracts.

Bachmann: Net, you need to add people in services. Is the headcount up or down?

Whitman: I believe we will have a smaller more profitable services business.

2:32 pm: Next question from Ben Reitzes of Barclays. Asking Meg about China. You said things are turning around there. Also, a point about demand for PCs.

Whitman: I don’t want to get out over my skis concerning China. But it is doing better. We have a new head of APJ. We feel better about the distribution system there. We are seeing positive signs of a stabilization and turnaround. We announced our new line in China for a reason. I feel good about it, but it’s early days. But as you know, it has been a tough road for HP in China.

Lesjak: In industry standard servers in China, we are doing well. We are doing well there in networking.

Whitman: We have a fledgling but growing services business in China.

Now on to end-user demand for PCs. There is demand and there is a refresh coming from Windows 8. We still worry about Europe. My personal prediction is that Europe will get softer before it gets better.

2:35 pm: Whitman is wrapping up now. We have not turned the corner, but we have made real progress. We are excited about continuing to execute over the next quarter and years.

And that’s the end of the conference call. I’ll be back with some additional comments and color in a few minutes at the top of this post.

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The problem with the Billionaire Savior phase of the newspaper collapse has always been that billionaires don’t tend to like the kind of authority-questioning journalism that upsets the status quo.

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