Arik Hesseldahl

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HP Shares Tumble on Dismal 2013 Outlook

The turnaround at computing and IT giant Hewlett-Packard is going to take quite a bit longer, and investors don’t like it one bit.

HP shares are setting new 52-week and 10-year lows after CFO Cathie Lesjak issued new guidance for fiscal 2013, saying the company now expects to earn between $3.40 and $3.60 on a non-GAAP basis, significantly lower than the $4.18 analysts had been expecting.

In afternoon trading, HP’s shares were down about 11 percent, in the neighborhood of $15.25.

Lesjak said HP continues to expect a difficult environment in Europe and a weak consumer market, and that every HP business segment except for software is bracing for a year-on-year decline in sales. She said she expects a 2 percent headwind from currency effects as the U.S. dollar remains strong against the euro. Operating margins are also expected to decline year on year, but the amount was not specified.

In remarks before Lesjak’s, CEO Meg Whitman painted a picture of a turnaround that at best wouldn’t be complete before 2016, with 2013 another year for declines in sales and profit.

Whitman said she sees 2014 as the year when the first signs of a turnaround would be apparent. “I believe that 2014 will be the year you see real recovery and expansion at HP,” she said. “You should see every business unit recover and grow. Our investments in R&D and IT will begin to kick in. And we will have demonstrated an ability to manage costs in line with revenue.” Also, more debt will have been paid down by then, she said.

HP indicated that much of the drag on its performance was in its Enterprise Services unit, the company formerly known as EDS. That unit is expected to see its sales drop by 11 percent to 13 percent, with operating margins expected to be flat to down 3 percent.

In another presentation, Mike Nefkens, the acting head of Global Services, and J.J. Chabon, senior VP and COO of the services unit, blamed the problems on “poor execution.” Operating margins in the services unit declined from north of 10 percent in 2010 to about 3 percent as of this year. They said that poor contracting practices led to pricing concessions to customers that turned out unfavorable to HP. Worse, HP Services saw revenue declines amounting to about 5 percent in relation to four major accounts, while an additional 2 percent was the result of currency effects.

It looks more or less like another example of HP taking its bitter medicine as it seeks to get things going in the right direction. You certainly can’t say that Whitman and Lesjak sugar-coated any aspect of the situation HP finds itself in. “HP did a good job self-diagnosing its many challenges and talking about optimizing near-term business, but they need to do more highlighting growth areas, analyst Patrick Moorhead, head of Moor Insights & Strategy told me. “HP must describe how it intends to win in a PC-plus, public cloud future before it will be seen as a growth company.”

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