HP Brings Curtain Down on Annus Horribilis Fiscal 2012
Last week, Hewlett-Packard stock traded below $13 a share. Closing Friday at $12.85, the shares finished the week at their lowest level since the fall of 2002. On Monday, the stock recovered by more than 3 percent, along with numerous other tech stocks that rose that day.
When the company reports its quarterly results Tuesday morning, it will bring to an ignominious close a fiscal annus horribilis during which there has been precious little good news and utterly no sign of the turnaround in business conditions that CEO Meg Whitman had hoped to bring. In fact, that turnaround now isn’t fully expected before 2016.
Whitman herself summed up a key problem in remarks at a meeting with financial analysts in San Francisco last month. The unprecedented turnover in the CEO’s office — the surprise resignation of Mark Hurd in 2010 after about five years on the job, coupled with the tragicomedy that marred the 11-month tenure of Léo Apotheker — brought on a sudden lack of corporate strategic focus that has wrought significant damage. “My belief is that the single biggest challenge at HP is the changes in the CEOs,” Whitman said that day. “There have been multiple inconsistent plans and executional miscues limiting the speed of recovery.”
Whitman, whose primary managerial bona fides stem from the decade she ran eBay, was supposed to right HP’s listing ship in short order. Instead, what she found was a more complex and fundamental set of business problems that by her own admission will take longer to correct than she originally thought, if indeed they can be corrected at all.
Commentators like myself have struggled to reduce the situation at HP to a crisp metaphor. At one point, HP seemed a battleship making a complex turn. Then it was an aircraft carrier. Yet as the understanding of the scale of HP’s problems have grown, so must the metaphoric imagery. If HP were a ship, Whitman would be trying to steer the world’s largest supertanker, with a damaged engine and only partial control of the rudder, with flooding on the lower decks and several upper decks on fire, all in hostile waters infested by pirates, with a storm brewing.
Last month’s meeting of analysts was meant to reset the expectations of the financial community for exactly how long it will take to finally fix HP, and the news wasn’t encouraging. Earning-per-share profits of $4 per year or higher had been seen as a key barrier that HP couldn’t afford to cross. Yet it did, projecting per-share profits of $3.40 to $3.60 on a non-GAAP basis. Horrified shareholders stormed for the exits, lopping HP’s share price by 13 percent in the process.
So what do the analysts expect from HP’s final report of the bloody fiscal year of 2012? The consensus view calls for HP to report a profit of $1.14 per share on a non-GAAP basis on sales of about $30.5 billion. Chris Whitmore of Deutsche Bank Securities says to expect weak sales of consumer PCs and enterprise servers and even weaker demand for printers than before to all weigh on HP’s results. “We do not see a ‘quick-fix’ for any of these issues and we anticipate ongoing revenue and profitability headwinds for HP in the medium term,” he wrote in a research note issued to clients on Nov. 8.
Well, duh. Here’s exactly how bad Whitmore thinks it could be:
- Revenue will be “light,” and by light he means a miss on the consensus expectation by as much as a billion dollars, and it could be down year on year by as much as 4 percent, led by a decline in the personal systems group that could be as bad as 12 percent year on year. Printer and enterprise revenue might be flat year on year, and that, he argues, is “optimistic.”
- Now for some good news, precious little though there may be: Gross margins may increase slightly to 23.3 percent company-wide, up from 23.2 percent, while operating margins may rise to 10.1 percent versus 9.7 percent a year ago, primarily on cost-cutting and restructuring actions already taken. That good news doesn’t come without some added trouble: The savings from all the cost-cutting are likely going to be offset by new investments to get HP’s IT services business — the company formerly known as EDS — back in reasonable shape. HP took an unprecedented $8 billion impairment charge related to EDS in August, and Whitman has already laid the expected decline in profits in fiscal 2013 at this business unit’s door.
- Expect to see market share losses in specialized servers. The high-end Business Critical Server business, once very profitable, has been hamstrung by doubt brought on by a yearlong and still technically incomplete litigation with software giant Oracle. HP won the first round, though Oracle has promised to appeal a judge’s order that it honor an agreement to continue to port its software to run with HP’s Integrity servers, which use Intel’s Itanium processor. IBM, Whitmore says, has been the primary benefactor of the kerfuffle, gaining share in a declining business. Meanwhile, sales of servers running mainstream x86-based chips aren’t exactly blowing anyone’s hair back.
- And if all that weren’t bad enough, there’s Europe. HP has the highest exposure to Europe of any of the major technology companies, and the continent accounts for about 37 percent of overall revenue. You don’t have to read a newspaper to know there’s trouble in those economies.
So now you know.
(Image via icanhascheezburger.)