HP to Take a Lot of Bitter Medicine in Earnings Report Today
We already know most of the bad news — and some of the good, though it was spare — that Hewlett-Packard will announce after the close of markets in New York today. It announced nearly everything worthy of note on Aug. 9.
The good news is that earnings, at $1 on a per-share basis, will be slightly higher than had been previously expected. The bad news is that those earnings will count only on a non-GAAP basis, because HP intends to take a combined $9.5 billion to $9.7 billion in charges this quarter, the most in its history: $8 billion for a writedown in the value of its IT services unit, the company formerly known as EDS; and $1.5 billion to $1.7 billion for restructuring charges associated primarily with the voluntary retirement and firing of some 9,000 HP employees.
The job reductions are only the first round of an expected 27,000 cuts that will occur between now and 2015. HP CEO Meg Whitman has said the restructuring is needed to get HP down to a size where its longer-term business prospects are more tenable.
However, the pressures on its many lines of business are numerous and intensifying. If the results that rival Dell reported yesterday imply anything, it’s that the state of the personal computer business, of which HP remains the global leader — though only by a whisker — is dismal.
Revenue from Dell’s PC business fell 14 percent, and its consumer business took the bluntest part of the blow, falling 22 percent from the year-ago period. HP may fare better, but only slightly so, says analyst Chris Whitmore of Deutsche Bank in a note to clients earlier this week. The consistent popularity of Apple’s iPad continues to eat into notebook sales, Whitmore says, while those still in the market for a new PC are waiting for Microsoft to get Windows 8 into the marketplace. “Looking ahead, we expect summer PC shipments to experience a slowdown ahead of the Windows 8 release, expected this fall and improving into the holidays with Win 8 related inventory restocking,” he wrote.
But PCs aren’t the only trouble spot for HP. Results from Canon, Lexmark and Xerox all point to a weak market for printers and printer supplies.
Then there’s servers and storage. Ongoing uncertainty in HP’s Business Critical Server business, brought on by the continuing legal fight with Oracle concerning the Intel-made Itanium chip, is hurting not only the sales in its high-end Integrity line of servers, but the associated service and support fees that HP collects from customers who buy them. Whitmore reckons that HP has lost some of its share of this specialized market to IBM. Meanwhile, sales of mainstream servers are also thought to have declined, as well, while in storage, EMC and NetApp are also thought to be taking business from HP.
If all that weren’t enough, there’s the vexing problem of HP’s services business: The writedown of EDS is only the first step in a long, complicated process that is intended to turn that unit toward a smaller number of more protein-rich, profitable contracts, and away from more numerous less-profitable ones. As Whitmore put it: “We expect these programs to take considerable time to develop and market. Increasing the size and depth of HP’s Services bench will likely take multiple quarters before translating into improving market share performance. As a result, we continue to expect a long, slow turnaround in EDS.”
On top of all that is the bitter frosting of the world economy. HP does more than one-third of its business in Europe, where the weakness of the euro versus the U.S. dollar adds additional headwinds that have only gotten worse since last quarter. And it’s unlikely to get better anytime soon, Whitmore says: “If the recent strengthening of the U.S. dollar is maintained, year-on-year revenue compares will continue to be a meaningful headwind in future quarters.”
See you later today.