Below is an internal HP memo sent to company employees on Friday. In it, Bradley names every key executive who will be responsible for running the new Printing and Personal Systems Group (PPS), which will essentially replace the existing Personal Systems Group (PSG) and the Imaging and Printing Group (IPG).

As previously reported, this business unit will be, by at least one key measure, the new big dog at HP. Based on 2011 sales, the combined group is responsible for $65 billion — more than 51 percent of HP’s overall sales. Yet the two groups are flailing: HP’s PC business is under attack, if for no other reason than the fact that prior CEO Léo Apotheker sought to spin it out and thus created some damaging uncertainty for the group’s longer-term prospects. Then there’s the little matter of Apple’s iPad and other tablets, a market segment where HP has no presence to speak of as yet.

The printing business, on the other hand, was once the financial engine that kept other bits of HP afloat. While printers are generally sold at a loss, ink cartridges and other supplies have been sold at much higher profit margins than other goods. The problem is that people are printing a lot less than they used to — and are showing the photos that they once printed on iPads and tablets, instead.

Anyway, Bradley’s team is listed in detail, below:

SUBJECT/ Organization announcement

TO/ All Printing and Personal Systems employees

March 23, 2012

HP Restricted – For Internal Use Only

As Meg said this week, this realignment is designed to make it easier for you to service customers, sell HP and make it easier for you to get work done.

In Printing and Personal Systems, this mission will be our passion and our focus, and we will lead from a position of strength. We are the global leader in printing and personal systems, and we have touched hundreds of millions of lives along the way. Now, as one team, we can accelerate our path to profitable growth while we deliver the best experience to more people.

Together, we are a $65 billion powerhouse with tens of thousands of employees around the world. But we haven’t reached our full potential. To accelerate our progress, we must act swiftly.

With this in mind, I am pleased to announce the best leadership team in the industry.

Global Business Units

Each of our four GBUs is accountable for product development and long term business results, working closely with the region and function teams. This begins with understanding customer insights, designing quality into our products upfront and delivering innovation that really matters to customers. These teams will work to provide a “better together” customer experience. The four GBUs are:

· Personal Computers led by James Mouton

· Inkjet and Web Solutions led by Stephen Nigro

· LaserJet and Enterprise Solutions led by Ron Coughlin. Mike Salfity and the platform development team will be hosted within Ron’s organization.

· Graphics Solutions led by Chris Morgan

Regions

To reach our potential we need to make it easier for our customers to buy from us, and for our sales teams to serve them. Together as one team, we have a clear opportunity to simplify and improve how we work with channel partners, drive market preference and expand our sales coverage.

Given the size and scope of PPS in the U.S., I have decided to create a new role within the traditional Americas region structure that is focused exclusively on our U.S. business. In all regions, collaboration is key during this transition to ensure we deliver on the fiscal year.

· Americas led by John Solomon. Within the Americas, Lynn Pendergrass will lead the U.S. Stephen DiFranco’s role will be announced at a later date. Meanwhile, Stephen will work with John and Lynn to ensure an orderly transition.

· Europe, Middle East and Africa led by Eric Cador. Bill DeLacy’s role will be announced at a later date. Meanwhile, Bill will work with Eric to ensure an orderly transition.

· Asia Pacific and Japan led by Dion Weisler. John Solomon will collaborate with Dion during the transition.

PPS Global Functions

Our functions are also closely aligning to help us will drive a more integrated and simplified approach to how we work. Again, collaboration will be key during the transition.

· Customer Service & Support led by Enrique Lores. Bruce Dahlgren will report into Enrique, leading Managed Enterprise Solutions.

· Operations led by Tony Prophet; Reinhard Winkler’s role will be announced at a later date. Meanwhile, Reinhard will work with Tony to ensure an orderly transition.

· Sales Operations and Project Management Office led by Joshua Brenkel

· EVP executive assistants are Denise Polanco and Susan Bergstresser

HP Global Functions

In the spirit of “One HP,” the following leaders are assigned to PPS, reporting to the respective EVP of their function.

· Finance led by Jon Flaxman, reporting to Cathie Lesjak. JJ Charhon, as previously announced, will lead finance for Enterprise Services.

· Marketing led by Eric Keshin, reporting to Marty Homlish; Manny Kostas’ role will be announced at a later date. Meanwhile, Manny and Eric will work together to ensure an orderly transition, including working with Henry Gomez to identify the communications professionals who will move to Global Communications.

· Human Resources led by Teri Eyre; Nancy Phillips’ role will be announced at a later date. Meanwhile, Nancy will work with Teri to ensure an orderly transition. Both Teri and Nancy report to Tracy Keogh, HR.

· Legal led by Gabriel Buigas, reporting to David Healy

These appointments are effective May 1. In addition to welcoming this team to their new and expanded roles, please join me in recognizing the remarkable contributions of all of the leaders of the former PSG and IPG organizations.

My team and I will provide clarity on the rest of the management team as quickly as we can after a thoughtful talent review. We intend to announce L3 leaders by May 1, L4 leaders by June 1, and to have all roles in the new organization clarified by August 1.* I will also hold monthly communication sessions to keep you up to date on what’s happening and ensure your questions and concerns are heard.

This is a great deal of change for each of us. But we must meet commitments to our customers, to our partners and to each other. The true strength of our organization cannot be captured in a simple organization chart — it is defined by the people who make HP work.

Thank you in advance for helping to drive PPS and HP forward.

Todd

*For those countries that require consultation with works councils or other employee representatives, this is not intended to provide country-specific information and in no way reflects that final decisions have been made at a local level. With respect to such countries, final decisions are subject to prior consultation with works councils and other employee representatives, and compliance with local law.

HP Shares closed down 52 cents to $23.46 a share, representing a drop of 2.17 percent in the wake of the official announcement of the plan, which AllThingsD reported yesterday.

While, on its face, the combination of the PC and printer groups into a single operation would save some operational costs, investors seem unconvinced that the move will make a sufficient difference to get the company moving in the right direction as CEO Meg Whitman has promised to do, though she’s conceded the turnaround will likely take years.

At least one analyst summed up the negative sentiment around the reorg. Rob Cihra of Evercore Partners called the move “uninspiring” and reminded everyone that HP made a similar move under former CEO Carly Fiorina back in early 2005 toward the end of her tenure. Her successor, Mark Hurd, broke the groups apart again before the year was out.

One thing Cihra appreciates is that Whitman is willing to admit where the troubles are: An over-levered balance sheet and a printing business that is suffering through a fundamental — not a seasonal — decline, among other problems. But, he writes in a research note issued to clients today, admitting the problem is only the first step. “It is encouraging for new CEO Meg Whitman to have started admitting issues others wouldn’t … Our concern is that any fixes look far from easy and likely involve a marathon, while ‘reorgs’ don’t even get HP to the starting line, in our view,” he wrote. Given the drop in HP’s share price, investors, for now, seem to agree.

In fairness to Whitman, she’s only six months into the job, and today’s move is only a first step. But the first step is pretty much an admission that a bigger change is on the way, including job cuts. “Everything is on the table,” Whitman told The Wall Street Journal today, though she declined to speculate on the number of jobs that might be eliminated. It’s going to be a rocky year at HP.

The reorganization appears to be bigger than we reported. There are a few other things, aside from the combination of the PC-making Personal Systems Group and the printer-making Imaging and Printing Group. One of them is a biggie: If I’m reading this right, then the $22 billion Enterprise Storage and Networking Group appears to have been renamed the HP Enterprise Group, and it appears that the $36 billion Services Group just got combined under Dave Donatelli. That is about as equally important a strategic shift as the other combination.

Update: Not quite so big, after all: HP just called to clarify that only Technology Services is being added to the Enterprise Group, not the Enterprise Services Group run by John Visentin. Sorry for that bit of confusion.

In another move, Global Sales will report to Donatelli, and will be combined into the Enterprise Group. And it looks like Jan Zadak, who had been on the rise since being promoted under Léo Apotheker last year to head Enterprise Sales, is going to get a “new role.”

So now we know what CEO Meg Whitman meant when she said she wanted to streamline and simplify HP’s operations. Operationally, she has created what appears to be one really huge organization in PSG ($65 billion in 2011 and flatlining) and to increase the size of the newly created Enterprise Group a bit by adding to it Technology Services and Global Sales. It’s hard to determine what the combined size of the organization is by revenue, because HP doesn’t break out sales for Technology Services.

Software appears to have been left alone in this shakeup, for now. That group is run by Bill Veghte, who was recently promoted to chief strategy officer, while another software operation, the Information Management Group, which combines Autonomy, the British software firm for which HP paid $12 billion last year and Vertica. It is run by Mike Lynch, the former Autonomy CEO. British software firm for which HP paid $12 billion last year.

Marketing functions have been unified under Marty Homlish, while communications have been unified under Henry Gomez.

Here’s the press release:

HP Announces Organizational Realignment

PALO ALTO, CA — (Marketwire -03/21/12) — HP (NYSE: HPQ – News) today announced an organizational realignment to improve performance and drive profitable growth across the entire HP portfolio.

As part of this realignment, HP’s Imaging and Printing Group (IPG) and its Personal Systems Group (PSG) are joining forces to create the Printing and Personal Systems Group. The combined entity will be led by Todd Bradley, who has served as the executive vice president of PSG since 2005.

Vyomesh Joshi, executive vice president of IPG, is retiring after a highly accomplished 31-year career at HP. Under Joshi’s leadership, IPG has grown revenue from $19 billion to $26 billion, and doubled its operating profit to approximately $4 billion.

“VJ embodies the spirit of HP and his impact on the company has been tremendous,” said Meg Whitman, president and chief executive officer, HP. “Under his leadership, IPG accelerated innovation and pioneered solutions that transformed the printing market. We wish him the very best as he embarks on a new chapter in his life.”

Combining these two entities will rationalize HP’s go-to-market strategy, branding, supply chain and customer support worldwide. This will lead to a better customer experience and drive innovation across personal computing and printing. This realignment is expected to provide opportunities for cost savings and accelerate HP’s ability to pursue profitable growth and reinvest in the business.

“This combination will bring together two businesses where HP has established global leadership,” said Whitman. “By providing the best in customer-focused innovation and operational efficiency, we believe we will create a winning scenario for customers, partners and shareholders.”

In addition to combining PSG and IPG, HP also is taking steps to unify and streamline certain key business functions.

The Global Accounts Sales organization will join the newly named HP Enterprise Group. This group will be led by David Donatelli and includes Enterprise Servers, Storage, Networking and Technology Services.

The new structure is expected to speed decision making, increase productivity and improve efficiency, while providing a simplified customer experience. A new role for Jan Zadak, executive vice president for Global Sales, will be announced at a later date. Zadak will work with Donatelli to ensure an orderly transition.

HP also announced that it will unify its Marketing functions across business units under Marty Homlish, executive vice president and chief marketing officer, HP. This will allow for even more effective brand-building and marketing activities, and will create efficiencies across the business units.

HP’s Communications employees worldwide also will be similarly unified under Henry Gomez, executive vice president and chief communications officer, HP. Together these two moves will create a more powerful voice to demonstrate the power of “One HP.”

Finally, HP is moving the Global Real Estate function from Finance into Global Technology and Business Processes to address real estate consolidation and improve the workplace experience for HP employees.

“Ensuring we have the right organizational structure in place is a critical first step in driving improved execution, and increasing effectiveness and efficiency,” added Whitman. “The result will be a faster, more streamlined, performance-driven HP that is customer focused and poised to capitalize on rapidly shifting industry trends.”

Yet HP is facing a significant problem in a key market: Printing. HP’s Imaging and Printing Group, or IPG, accounts for roughly 20 percent of HP’s revenue, making it a bigger business by revenue than the enterprise and server, storage and networking businesses.

As it does with most printer vendors, the business model of IPG works like this: HP sells a printer, more often than not at a loss, then makes up for the loss by selling the customer ink and other supplies over the next several years of the printer’s useful life.

In this business, HP is the king. In a survey of the state of the printing market issued last week, the market research firm IDC pegged HP’s overall share at north of 41 percent. In 2011, by IDC’s reckoning, HP sold more than twice the number of printers as its nearest rival Canon, and more than the combined unit sales of its nearest three rivals — Canon, Epson and Samsung.

So what’s the problem? The printing business is on the wane. For all of 2011, combined sales grew by 0.7 percent, according to IDC, and what little growth there was didn’t go to HP. IDC says HP’s printer shipments declined by 0.7 percent last year, while Canon, Samsung and Brother all saw their shipments grow.

And sales in key market geographies make the picture look even worse. In the U.S., for example, IDC says the market for printers in 2011 contracted by 9 percent, while HP’s unit sales plummeted by more than 12 percent. On a unit basis, IDC says, HP sold fewer than 4.2 million printers to U.S. customers, compared to 4.8 million in 2010.

Slowing hardware sales are only the leading edge of the problem. Remember that HP takes a loss on every printer it sells and makes it up on much more profitable supplies. Here’s where the numbers start to look scary: As overall revenue in the IPG was essentially flat year on year in 2011 — sales were $25.78 billion in 2011 versus $25.76 billion in 2010 — sales of supplies declined.

That may not seem important, until you realize that sales of supplies account for more than two-thirds of IPG’s revenue: Printer supplies are a $17 billion annual business that had been growing until 2011 when sales headed south. Sales of ink cartridges tend to track sales of new printers on a six- to nine-month lag, but there’s also a long tail that feeds into the existing installed base. Printers can stay in service for years, gobbling up ink.

A decline in ink sales can have an outsized impact in IPG’s profitability: Operating margins in IPG declined from 17.1 percent in 2010 to 15.4 percent in 2011.

And if market trends weren’t enough to drag down HP’s printer business, there are economic ones, too. Canon manufactures key parts of HP’s LaserJet printers in Japan. That caused two significant problems: Logistics costs increased as a result of the earthquake and tsunami that hit Japan last year. Meanwhile, the strength of the Japanese yen relative to the U.S. dollar is adding even more incremental costs.

The bottom line: Printing has been one of HP’s long-term strengths. If people are printing less, they’re buying fewer printers. And if they’re buying fewer printers, they’re buying less ink. All of it is bad news for the world’s biggest printer company. We’ll see just how bad on Wednesday, when HP reports its latest results.

Is Whitmore just seeing the world through some rose-tinted shades? After all, consider the state of the industry — PC sales are suffering generally from a prolonged case of iPad envy among the consumer set, the ongoing shortage of hard drives brought on by the flooding in Thailand, and a global economy that has Europe flat on its back, the U.S. recovering but wobbly, and every other region tenuous. Meanwhile, HP and Dell aren’t exactly their old selves.

And yet here’s Whitmore explaining his positive expectations from both, in a note to clients today: “Investors appear to be positioned for solid results from both HP and Dell as recent data suggests enterprise IT spending finished 2011 well. We expect IT spending to gain momentum through 2012 due to an improving US macro backdrop and forthcoming product cycles.”

Pretty good, relatively speaking. Whitmore goes on at length on each company. About HP, he says its recently lowered expectations — CEO Meg Whitman has designated 2012 as a rebuilding year — will be easy to beat. Revenue might even come in below expectations of $30.1 billion, but per-share earnings will probably beat the consensus of 87 cents. The reason? Corporate demand for IT hardware, specifically PCs and servers, remains healthy in the face of weaker demand for PCs among consumers — the iPad is sapping demand — and a weakness in sales of printers. Recent cost-cutting, favorable prices on commodity components, and other changes made in recent restructurings will combine to give HP a slight edge on the EPS front, Whitmore says.

That’s not to say there isn’t still some messy business yet to finish at HP. While its official guidance forecasting a per-share profit of $4 in 2012 still stands, there’s still the ongoing strategic question of addressing its weakness in the consumer PC business with a tablet that can take on Apple’s iPad. Also, results from Lexmark and Canon, Whitmore says, show continued weakness in the printer business, which will hit HP right where it hurts.

Then there’s the longer-term questions, like Whitman’s ultimate plan to save HP, and how the $10.6 billion acquisition of Autonomy is going to further that goal. “We believe investors will continue to focus on Meg Whitman’s long-term vision for HP and her efforts to revitalize HP’s growth strategy,” Whitmore wrote. “Specifically, an update on the integration of Autonomy, plans to reposition Services, growth plans for printing and its PC strategy are all important topics that need to be addressed.”

Then there’s Dell: As with HP, Whitmore says to expect soft results on the revenue side, but healthy profit margins and a decent upside to per-share earnings. Healthy demand from big companies should be offset by weaker demand from government clients and consumers. The consensus estimate has Dell reporting $15.9 billion in sales and 50 cents a share in earnings. Dell’s server sales finished strong in 2011, Whitmore says, and its customers tended to shift toward higher-priced, more profitable machines. He expects Dell’s gross margin to be 22.5 percent, up slightly from the 21.5 percent seen in the year-ago quarter.

He expects Dell to have a pretty good year, too: Modest growth in revenue should be accompanied by ever-better gross margins. Dell made some big investments in 2011 that added to operating expenses, and Whitmore expects the company to put those investments to work in 2012. As such, the $2.04 per-share profit that Dell has forecast for the year could prove conservative. He sees Dell reporting a profit of $2.20 for the year.

Correction: I initially got the days that Dell and HP are reporting their results wrong and have since fixed it. Sorry about that.

(Larry David image is on this T-shirt.)

Veghte joined HP in 2010 after 20 years at Microsoft, where he managed the $15 billion Windows business and oversaw the launch of Windows 7. At HP, he has been credited with growing its software revenue by 18 percent last year.

Given Veghte’s history as a software guy, his appointment to this role can’t help but be seen as a key signal by CEO Meg Whitman of the role she sees software playing in HP’s strategy going forward. That was one of the things I asked Veghte about when we spoke by phone earlier this week.

AllThingsD: What, in your view, is the role of the chief strategy officer at HP, and what do you expect it to entail in the coming year?

Bill Veghte: As we’re out talking to customers, they’d like to buy more from HP; they’d like HP to be more successful. They look at the advances we’re making in networking or storage or printers, but they want to know why the whole is greater than the sum of is parts. What is HP’s strategy for continued leadership in the market transitions that are going on? And some customers would say that where HP is concerned, that’s not a fully realized opportunity.

And you’re coming at it from the software part of the business, and we’ve heard from Meg saying she’d like to grow opportunities in software. Your appointment, to me, sends a bit of a signal that software is going to be a big part of HP’s strategy to get things turned around. Is that accurate?

I think, certainly, as I talk to Meg and Ray [Lane, HP chairman], and with the members of the executive committee, I’ve found that this is a catalyzing role. If done right, there are different models of strategy in different Fortune 500 companies. And the one that makes sense here is catalyzing with other business units. Whether that’s Vijay Joshi in printing and imaging, or with Todd Bradley in PCs, or John Visentin in the enterprise group, there’s a strategy that each one of those is trying, and which is accretive to a whole that is greater than the sum of the parts. And so, to the extent that software is glue or networking is glue, I think it’s a statement that has more to do with a pan-HP strategy than something that’s specific to software.

What’s Job One, starting on your first day?

Job One is making sure that as we have those conversations with customers, they see an HP that is unified around a set of constructs and offerings that deliver what they need. It’s different from having offerings that are, by themselves, individually great. It’s about having unifying themes and constructs.

It seems that you’re talking about finding a way to routinely and thoughtfully combine different things that HP makes or does, in ways they aren’t being done now. Is that what you’re getting at?

I think that very accurately characterizes the opportunity. When we talk to the leadership team, we hear a lot of the same thing. There is a lot of great stuff within HP, whether you get that in terms of market position, or IP, or people. I like how you put that: How do you routinely and thoughtfully combine things, particularly in light of the market inflections that are happening. We are in a tectonic shift, and that can be an opportunity, if you clearly spell out the value proposition for customers. Not only in each one of the units, but where you’re thoughtfully combining them so that the whole is greater than the sum of its parts.

I thought of an example around meeting the needs of the market. There was an IHS iSuppli report out earlier this week about cloud servers, which are growing. But customers are going to Taiwanese ODM companies to get customized products, while at the same time cloud servers are growing generally. Is this the sort of thing that might affect HP?

I was talking to Dave Donatelli [general manager of Enterprise Servers] about this recently. It’s interesting, because it seems like in more recent months it has flipped back, because of the integration within that customization. A great example that Dave and I have been working on is the whole cloud system piece. You’ve got a lot of great stuff in automation and orchestration software that is inherently cross-platform, and which crosses virtualization engines and marrying that deeply with the converged infrastructure. We’re the only company that can give you a single stack, soup to nuts, from a single vendor. The core construct is that there’s a lot of private cloud build-out going on, and those customers who are doing it are saying they don’t want to be the systems integrator for six different vendors, and they also prefer not to be locked in to a single vertical stack. That’s a huge advantage for us. And to your point about routinely and thoughtfully combining, we should do exactly that. It’s been doing well for us in the marketplace, but how do you make that routine against the opportunities we see in the marketplace?

You spent about 20 years at Microsoft. How does that inform what you’re bringing to this job?

At the core, any of these jobs are about identifying and exploiting market shifts for customers. I had the privilege of having a front-row seat during some big marketplace disruptions, and helping catalyze businesses and delivering superior market positions and solutions. It’s all about handling change, and turning it into an opportunity.

When you consider the fact that Lexmark is a printer company — and not even an especially large one by comparison to others in the business — you might intuitively conclude that it’s a company on the defensive.

“People don’t print anymore,” goes the refrain of conventional wisdom, “not even at the office.” It’s easier and more efficient now, when you need to refer to a digital document and have it close at hand, to send it to a tablet like an iPad, or even to a smartphone.

And yet, Lexmark is anything but on the defensive. It has been expanding in recent years, primarily by acquisition. In October, it spent $50 million to acquire Pallas Athena, a Dutch software firm specializing in managing and automating business processes — the flow of information through a company. Lexmark combined Pallas Athena with its previous acquisition, Perceptive Software, for which it paid $280 million in 2010; Kansas-based Perceptive specializes in managing unstructured data. Lexmark CEO Paul Rooke says that the two companies combined give Lexmark a position that is unique among companies in the printer business: The ability to help a customer manage and access information in whatever format makes the most sense.

While Lexmark is significantly smaller by revenue than its biggest rival — Hewlett-Packard’s printing division booked $26 billion in fiscal 2011, while Lexmark is on track to report about $4.2 billion in revenue, according to the consensus view of analysts — it is still able to win business away from its larger rivals, and keep those customers. I asked Rooke about this in a recent conversation:

AllThingsD: Paul, the conventional wisdom has held for a long time that printing was a dying business, and that paper was going to go away because everything would be digital. I think that’s been the general criticism of Lexmark since it first spun out of IBM 20 years ago. What do you think of that?

Paul Rooke: We’ve always seen ourselves not so much as a hardware company. When we started, back in 1991, we were evolving from printers to multifunction printers to fleet management. You can see that in our actions. We also want customers for life. We create industry-specific solutions in a responsible way. It’s not just the blocking and tackling of managing a company’s fleet of printers, but it’s about getting intimate with their business processes and managing the paper and ink and so on. And as we’ve evolved, we’ve become more of a solutions company. We like to say “print less, save more.” When we say that, we’re all about helping with smart devices and managing that fleet. But it also refers to capturing, managing and accessing content within the context of a business process.

Well, let’s talk about that a little. When you say “capturing and managing content and information,” what does that mean?

As we found ourselves managing these multifunction devices that have scanners built into them, we found ourselves capturing content off of paper and into digital infrastructure, and we’re looking to do more of that than we have been. You’ll see us do more interpretation of content and automatically routing documents according to what’s on them. But it doesn’t stop there. We found ourselves scanning documents and putting them somewhere and managing them. Our acquisition of Perceptive Software last year has really strengthened that as a value-add for us. A lot of the content that comes in is this messy unstructured content, and with Perceptive, we’re able to help customers manage this unstructured content and finally access it in the context of their business process. And that’s where our Pallas Athena acquisition comes in. When you put it all together, it puts us in a unique position in the industry. We’re not just a printer maker, but we link into the business processes and provide added value for our customers.

“Unstructured data” is a phrase I hear a lot. What does it mean, specifically, to Lexmark?

It’s anything that doesn’t fit in massive databases that are arranged in traditional rows and columns, like financial information and shipping information. In contrast, you might take something like an admission system at a university. It might have some core intake information that’s structured, like a name and birthdate, but then there’s a lot of other information around it, like transcripts and reference letters, that goes into making a decision. Another example is in hospitals, where you have a doctor or nurse looking into a patient file. All hospitals have information systems that keep track of the basic information on a patient. But then there’s other information — like blood tests and X-rays — that’s unstructured, which the doctor will want to look at in order to make a better-informed decision. As you go around in all industries, there are a lot of examples of this sort of data. It really appears in all business environments.

And yet, the core business is still printers and printing. And for myself, I find myself printing a lot less, sending things I need to refer to to my iPhone or iPad and skipping the printer. Do people like me represent a long-term danger to you, or is that really just an issue of perception?

When you look at information generally, the amount of information and content that’s being generated just continues to grow. The ability to access it in an organized fashion is a key challenge for customers, whether they print it or not. But with that growth in information, even if a smaller percentage is printed, there’s still an opportunity for growth in absolute terms. But having said that, as our strategy has evolved, if a customer chooses to print it or store it, we’re going to be there for them. We’re trying to put the tools and technology in place for whichever way the customer goes. There’s a number of industries — government is one, social services is another — where there are customer-facing industries, where you need to fill out a form or a document that requires a signature; many still prefer paper, because it’s inexpensive and easy. Some choose to do that digitally, some choose paper. And when we talk to customers, they’re asking for help in bridging those two worlds. That’s where we jump in and help.

What is the most important thing that customers are saying to you, in terms of their needs? Is it all cost control, which is top of mind so often these days? Or is it something more?

Cost control is certainly there, as is lower-cost devices. These are certainly propositions that play well with customers who want to reduce the cost of their imaging infrastructure. When we engage customers in the managed-service relationship, they often don’t even know how many printers, copiers, fax machines and scanners they have, until we help them assess it and optimize it and hook their devices into a system that helps them control it all. And our managed print services are helping them keep those costs under control. The other thing we’re hearing about is process improvement. With Perceptive, and now Pallas Athena, we help them understand better what their processes are. We have a lot of technologies that map these processes out — not what you think they are, but what they really are. So many times, when you do process improvement, you spend months in a conference room, drawing out what you think the process is on a white board. We can eliminate that step by plugging in the tools and doing a quick digital assessment of what the process actually is, and map it for you digitally. So if you think your process is made up of steps A, B and C, we can come and show you that there’s also D, E, F and G that you didn’t think of. We’ll show you why they’re there, and where the bottlenecks are, with factual data you can work with. Which is a lot better than speculation.

Where do you think your competitors — and name whomever you want — are vulnerable? Where are you winning business away from competitors?

We turned 20 years old this year. Many thought we wouldn’t survive. I think, while the technologies have certainly evolved, the thing that has differentiated us from our competitors is our depth. We go deep with our customers, and get very intimate with them in their industry and their environment and their processes. That’s why customers buy Lexmark. When we’re up against people like HP or Xerox or others, we’re able to get closer to the customer than they are, and do things in a more customized fashion. I think we’ll be doing more of that as we fill out our technology set.

So what kinds of things should we expect from Lexmark in 2012? Are you done doing acquisitions?

You’ll see us enhance our capabilities. Some people think we’re moving away from printing, and that’s not it at all. But we’re adding to it. In addition to that, we’ll continue to integrate Perceptive and Pallas Athena into a more integrated suite of solutions. That will put us in a unique position. The acquisitions are part of the strategy. When we identify gaps or holes in our offerings, we look to fill them either organically or inorganically with acquisitions. We’ll continue to look at those as part of the strategy. We’re not looking for a big one. The ones we have done have been smaller, but of companies with technologies that have high potential for synergies. But we’re still looking.

Then Whitman hedged: “Let me put it that way. I would say these are going to be more acquisitions, in the sub-$500 million range would be my guess. We might get to $1 billion, but I doubt it.”

Now we know what she meant by that. Overnight, HP said it will acquire Hiflex Software, a German maker of printing management software. The deal is small enough that terms haven’t been disclosed, and that makes it hard to analyze.

Hiflex is based in Aachen and specializes in supplying print services to the commercial printing and graphics industry. Launched in 1991, it has completed some 300 customer projects, and its products are generally used to help different parts of a printing operation work together.

Vyomesh Joshi, HP’s executive vice president and the head of its Imaging and Printing group, described the deal like so: “HP wants to break the traditional barriers of how and where business customers print, making it easy for them to produce custom or personalized materials anywhere, anytime … Hiflex’s technology provides a powerful platform to deliver on this goal as part of our overall cloud printing strategy.”

Brian Marshall, an analyst with ISI Group, said in a note to clients this morning that he thinks it’s a “small deal,” but one that amounts to “an inexpensive way for HP to build exposure to cloud services that integrate with existing HP assets,” like printing.

If HP is going to be acquisitive at all during 2012, the deals are going to look like this. Now, at least, we know what to expect. And, as Whitman sets expectations, so far she’s sticking to what she says, which is a good sign.

Printers are Internet-connected devices just like computers. They have their own operating systems and software, and so, in theory, are vulnerable to attacks by hackers just as computers are. There was an old urban myth that in the run-up to the first Iraq War in 1991, hacked HP printers shipped to Iraq were instrumental in shutting down Iraqi radar systems. It wasn’t true — it was published on April 1 of that year by the trade magazine InfoWorld — but the idea stuck, and at least one group of security researchers has been studying the use of Trojans installed into printers.

The Columbia researchers had claimed that a part inside a printer called a fuser, used to dry the ink, could be remotely instructed to overheat, eventually causing paper inside the printer to turn brown and start to smoke.

Conceptually it’s not that different from the Stuxnet attack against the Iranian nuclear research program. The attackers in that case, thought to be Israel with a little help from the U.S., attacked industrial control computers known as SCADA systems that serve as the bridge between typical Windows-based machines and industrial equipment that the SCADA systems control. In the case of Stuxnet, the SCADA systems were controlled — often they have only default passwords or no passwords at all — and the machines they were connected to could be instructed to literally destroy themselves.

Some researchers at the U.S. Department of Energy’s Idaho National Lab did just that in the video below, showing in a controlled environment that a generator could be hijacked over the Internet and made to destroy itself.

But could you do the same thing with a printer? Theoretically, I’d say it’s possible. But in this case, HP says not where its printers are concerned.

Below is an internal HP memo from Vyomesh “VJ” Joshi, the head of HP’s Imaging and Printing Group, that was circulated to employees today.

First off, he says, the fire issue is not true. As noted in the public statement, HP’s printers have a component called a thermal breaker that prevents the fuser from overheating, and it can’t be overcome by a firmware upgrade.

But Joshi also spanks the Columbia researchers for turning to the media and not calling HP first, which is the way security researchers usually operate when they identify a serious vulnerability. There is, he concedes, a vulnerability to malicious firmware modifications, especially on printers that are left unprotected on a network without a firewall running. HP aims to fix that. But usually in these situations, the media doesn’t get called until a fix is ready. “Unfortunately in this situation, a Columbia representative took it upon himself to contact the media and reports were published prior to a solution being available,” he writes.

Joshi’s full memo is below.

From: IPG, Vyomesh Joshi
Sent: Tuesday, November 29, 2011 4:40 PM
Subject: Inaccurate Printer Security Press Coverage

Dear IPG Employees,

As many of you have read today there has been sensational and inaccurate press coverage regarding potential security risks with some HP LaserJet printers. I wanted to make sure you had the most current information and context for this situation. No customer has reported unauthorized access. We have also seen speculation in the media regarding the potential for devices to catch fire due to a firmware change. This claim is inaccurate. We have issued a public statement communicating to customers and partners and refuting inaccurate information.

This information first came to us late last week from a research lab based at Columbia University. As a result, we have identified a specific vulnerability exists for some HP LaserJet devices if placed on a public internet without a firewall or if a malicious effort is made to modify the firmware of the device by a trusted party on the network. Our security team is taking immediate measures to build a firmware upgrade to resolve any potential risk and will be communicating this proactively to customers and partners who may be impacted.

Typically when a security issue is identified, responsible disclosure is followed so that vulnerabilities are not made public until a solution is available. Unfortunately in this situation, a Columbia representative took it upon himself to contact the media and reports were published prior to a solution being available.

We have always taken security very seriously. In fact, HP’s reputation for security continues to be among the highest in the industry. I want to assure you that our security experts are working around the clock to mitigate any potential risk.

We will make every effort to communicate new information as it becomes available.

Regards,

VJ

Earnings per share were $1.17, versus the consensus of $1.13, on sales of $32.3 billion, also slightly ahead of the consensus.

However, the guidance looks weak. HP said it sees fiscal year 2012 earnings coming in at at least $4, well below the consensus of $4.56, and not really even in the “just right” territory that I wrote about this morning.

“We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution,” CEO Meg Whitman said in a statement.

HP shares took a beating today, but so did the rest of the market. HP closed down more than 4 percent at $28.84. The shares are down more than 36 percent since the start of the year.

Here’s the full earnings news release:

PALO ALTO, CA–(Marketwire -11/21/11)- HP

Fiscal 2011 non-GAAP net revenue of $127.4 billion, non-GAAP diluted earnings per share of $4.88 and free cash flow of $9.1 billion grew 1%, 7% and 8%, respectively, over the prior year

Fiscal 2011 GAAP net revenue of $127.2 billion, GAAP diluted earnings per share of $3.32 and cash flow from operations of $12.6 billion

Fourth quarter non-GAAP net revenue of $32.3 billion, non-GAAP diluted earnings per share of $1.17 and free cash flow of $1.2 billion were down 3%, 12% and 43%, respectively, from the prior-year quarter

Fourth quarter GAAP net revenue of $32.1 billion, GAAP diluted earnings per share of $0.12 and cash flow from operations of $2.4 billion

HP today announced financial results for its fourth quarter and full fiscal year ended Oct. 31, 2011.

“HP has a great opportunity to build on our strong hardware, software, and services franchises with leading market positions, customer relationships, and intellectual property,” said Meg Whitman, HP president and chief executive officer. “We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution.”

“While FY11 proved to be a challenging year, we grew non-GAAP EPS 7% and generated $12.6 billion in cash flow from operations,” said Cathie Lesjak, HP executive vice president and chief financial officer. “We’re remaining cautious heading into FY12 but are focused on delivering our earnings outlook and driving shareholder value.”

Earnings highlights

—————— —————————— ————————–
Q4 FY11 Q4 FY10 Y/Y FY11 FY10 Y/Y
—————— —————————— ————————–
GAAP net revenue
($B) $ 32.1 $ 33.3 (3%) $127.2 $126.0 1%
—————— —————————— ————————–
GAAP operating
margin 2.5% 9.9% (7.4 pts) 7.6% 9.1% (1.5 pts)
—————— —————————— ————————–
GAAP net earnings
($B) $ 0.2 $ 2.5 (91%) $ 7.1 $ 8.8 (19%)
—————— —————————— ————————–
GAAP diluted EPS $ 0.12 $ 1.10 (89%) $ 3.32 $ 3.69 (10%)
—————— —————————— ————————–
Non-GAAP net
revenue ($) $ 32.3 $ 33.3 (3%) $127.4 $126.0 1%
—————— —————————— ————————–
Non-GAAP operating
margin 9.7% 12.0% (2.3 pts) 10.8% 11.4% (0.6 pts)
—————— —————————— ————————–
Non-GAAP net
earnings ($B) $ 2.4 $ 3.1 (23%) $ 10.4 $ 10.9 (4%)
—————— —————————— ————————–
Non-GAAP diluted
EPS $ 1.17 $ 1.33 (12%) $ 4.88 $ 4.58 7%
—————— —————————— ————————–

Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below. Unless otherwise specified, all revenue amounts below are calculated on a GAAP basis.

Full year fiscal 2011
GAAP net revenue for the full fiscal year 2011 was $127.2 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. GAAP operating profit was $9.7 billion, and GAAP diluted earnings per share (EPS) was $3.32, down 10% from the prior year.

Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. Non-GAAP operating profit was $13.8 billion, and non-GAAP diluted EPS was $4.88, up 7% from the prior year.

Fiscal 2011 non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in the fourth quarter in connection with the wind down of HP’s webOS device business, net of fourth quarter webOS device revenue. Non-GAAP earnings and operating profit information excludes after-tax costs of $3.3 billion, or $1.56 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011
For the quarter, GAAP net revenue of $32.1 billion was down 3% from the prior-year period. Non-GAAP net revenue of $32.3 billion was down 3% from the prior-year period as reported and down 6% when adjusted for the effects of currency.

GAAP diluted EPS was $0.12, down 89% from the prior-year period. Non-GAAP diluted EPS was $1.17, down 12% from the prior-year period.

Fourth quarter non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in connection with the wind down of HP’s webOS device business, net of webOS device revenue for the period. Fourth quarter non-GAAP earnings information excludes after-tax costs of $2.1 billion, or $1.05 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011 trends and regional performance
In the Americas, fourth quarter GAAP net revenue was $14.5 billion, down 4% year over year and down 5% when adjusted for the effects of currency. Non-GAAP net revenue in the Americas was $14.6 billion, down 3% year over year and down 4% when adjusted for the effects of currency.

Europe, the Middle East and Africa GAAP revenue of $11.7 billion was down 6% year over year and down 10% when adjusted for the effects of currency. GAAP revenue in Asia Pacific was $6.0 billion, representing a 3% increase year over year, and down 4% when adjusted for the effects of currency.

GAAP revenue from outside of the United States in the fourth quarter accounted for 65% of total HP revenue. BRIC countries (Brazil, Russia, India and China) generated revenue of $3.8 billion, up 9% over the year-ago period, for 12% of total HP revenue.

Revenue in HP’s commercial businesses declined 2% year over year. Revenue in HP’s consumer businesses, within PSG and IPG, was collectively down 9% year over year.

Fourth fiscal quarter 2011 business group results

Services revenue of $9.3 billion grew 2% year over year with a 12.8% operating margin. Technology Services and Application Services revenue grew 3% and 2%, respectively, while IT Outsourcing revenue grew 1% and Business Process Outsourcing revenue declined 2%.

Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 13.0% operating margin. Networking revenue was up 5%, Industry Standard Servers revenue was down 4%, Business Critical Systems revenue was down 23%, and Storage revenue was up 4%.

HP Software revenue grew 28% year over year with a 27.7% operating margin. HP Software revenue was driven by revenue growth in licenses and services of 33% and 36%, respectively.

Personal Systems Group (PSG) revenue declined 2% year over year with a 5.7% operating margin. Commercial client revenue grew 5%, and Consumer client revenue declined 9%. Total units were up 2% with 5% growth in desktop units and 1% growth in notebook units.

Imaging and Printing Group (IPG) revenue declined 10% year over year with a 12.8% operating margin. Commercial revenue was up 4% year over year with commercial printer hardware units up 5%. Consumer printer hardware revenue was down 8% year over year with an 8% decline in units.

Financial Services revenue grew 18% year over year driven by double-digit growth in both lease volume and portfolio assets. The business delivered a 10.3% operating margin.

Asset management
HP generated $2.4 billion in cash flow from operations in the fourth quarter. Inventory ended the quarter at $7.5 billion, with days of inventory up 4 days year over year to 27 days. Accounts receivable of $18.2 billion was up 1 day year over year to 51 days. Accounts payable ended the quarter at $14.8 billion, flat from the prior-year period at 52 days. HP’s dividend payment of $0.12 per share in the fourth quarter resulted in cash usage of $239 million. HP also utilized $500 million of cash during the quarter to repurchase approximately 17 million shares of common stock in the open market. HP exited the quarter with $8.1 billion in gross cash.

Outlook
For the first quarter of fiscal 2012, HP estimates non-GAAP diluted EPS in the range of $0.83 to $0.86, and GAAP diluted EPS in the range of $0.61 to $0.64.

First quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2012 non-GAAP diluted EPS of at least $4.00 and GAAP diluted EPS of approximately $3.20.

Full year fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.80 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

In order to more effectively manage HP as one company and align its guidance policy with its long-term objective of delivering profitable growth, HP will only be providing a quarterly and annual earnings per share outlook. The company believes that earnings per share is a better indicator of successful execution across its various business levers. HP remains committed to high levels of disclosure and transparency, including general commentary on its expectations relating to future revenue and business segment performance, and will continue to provide detailed segment-level financial performance data for completed fiscal periods.

More information on HP’s quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at www.hp.com/investor/home.

HP’s Q4 FY11 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2011q4webcast.

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com.

It will also be the first earnings release since the infamous fiasco of Aug. 18, when HP shocked investors with a truckload of news: The shutdown of the webOS hardware business, the now-concluded review of strategic options for the PC business, the acquisition of the British software firm Autonomy and a lowering of its revenue outlook.

The consensus of Wall Street analysts calls for HP to report sales of $32.1 billion and per-share profits of $1.16. At that level, sales growth would amount to about 3 to 4 percent on a sequential basis. Which, writes analyst Toni Sacconaghi of Bernstein Research in a note to clients on Friday, is substantially slower than the 8 to 14 percent HP usually grows sales in its fourth quarter.

HP consistently beats the consensus number — 25 of the last 26 quarters, by Sacconaghi’s count — so there’s a pretty good chance the company will do it again, despite an aggressive pricing environment for PCs, economic weaknesses in Europe and headwinds from the effect of currencies. When HP issued profit guidance in August for this quarter — the range was $1.12 to $1.16 a share — it implied that operating margins would be down by about 0.3 percent to up by 0.1 percent. This would be, Sacconaghi writes, the worst quarter-on-quarter change in operating margin since HP acquired Compaq in 2002.

Yet the results for the quarter are almost of secondary concern. All eyes will be on guidance that HP gives for 2012. It must be realistic, but not too low; achievable, so not too high. Guidance that Goldilocks could love — just right. HP has been lowering its guidance all year, but that was under prior CEO Léo Apotheker. The right number for EPS guidance in 2012, Sacconaghi says, is at least $4.25 a share, though he’s estimating HP will finish 2012 at $4.80, which is a reduction from his previous estimate of $5.15.

Also, it should set some clear priorities for capital allocation, Sacconaghi writes. HP took a lot of heat for paying $11.7 billion for Autonomy. Whitman has yet to set the table strategically for HP: Does it need more “transformation”? Or is it a mature company with slow predictable growth targets that routinely gives cash back to shareholders in much the same way IBM does? In choosing the latter, Sacconaghi says, HP could grow sales by at least 2.5 percent a year and per-share profits by 9 to 10 percent a year for the next three to five years.

HP can expect to produce free cash flow next year, in the range of $8 billion to $10 billion. If it were to buy back $4 billion worth of stock, it would reduce the share count by about 7 percent, and thus goose its EPS accordingly. One important signal on this front is the addition of activist investor Ralph Whitworth to HP’s board. Whitworth is likely to advocate the return of cash to shareholders and lean against big acquisitions.

Finally, there are lots of challenges in HP’s individual business units, none of them insurmountable. The printer unit is still recovering from the effects of the earthquake in Japan. Certain high-demand models are running short, yet there’s a lot of lower-demand models in inventory. Sacconaghi expects sales in the unit to drop 6 percent. In services, HP has had some problems delivering profit growth. Expect some explanation around that in the commentary today. In the PC business, expect some explanation of the effects HP is seeing from the flooding in Thailand which is causing a worldwide shortage of hard drives. In the Business Critical Server business, which is where HP sells its high-margin Itanium-based servers, the impact from the ongoing brawl with Oracle is making it difficult to close deals, Sacconaghi writes.

Overall, he insists that HP — despite its troubles over the last year — remains an attractive investment for patient investors. It still leads the market segments it participates in, except services, and still has fair room for growth. Sacconaghi rates HP as “outperform,” and expects it to hit a price of $37.

Indeed, when HP first announced its plans to jettison the business, I was racking my brain trying to think of another example of a company getting rid of a unit that was the biggest in the world at what it did. Nonetheless, had the company decided to sell or spin off the unit, it probably would have had more than a few options.

But, when it comes to what to do with webOS, the situation Whitman and HP face is a lot tougher. Though praised for its interface, the fact is that the mobile operating system has suffered from a lack of resources under both Palm and Hewlett-Packard. To thrive, operating systems need good hardware, masses of interested developers and a backer with deep pockets and long-term focus.

The most logical potential acquirers have clearly taken a pass — some of them quite publicly. HP could, of course, continue to fund webOS itself, though it continues to lose talent from that unit — most recently Richard Kerris, who headed the company’s outreach to developers.

Plus, it’s not like the mobile world is hurting for options. Apple’s iOS and Google’s Android are the obvious leaders, but Microsoft and Research In Motion are also in the game and neither can really afford not to succeed.

One interesting option — one that has circulated within HP, though has yet to win favor — is to simply give away webOS and its developer tools to the community, allowing it to be an open source alternative for mobile (and potentially other) devices.

Whatever HP is going to do, it had better act fast or the discussion will be moot. As Jack Ma recently noted of Yahoo, technologies that are neglected are like flowers that don’t get attention. They wither and die.

Now that new HP CEO Meg Whitman has decided to keep the PC business rather than spin it out as her predecessor Léo Apotheker had proposed, HP appears to be heading back, however slowly, toward the kind of stability for which it had long been known.

But can it still perform? Bernstein Research analyst Toni Sacconaghi took the opportunity to examine the company’s business units and finds that, yes, the prospects for growth aren’t unreasonable. The current portfolio of HP’s business, he estimates, is likely to grow its sales organically by a combined 2.5 percent on an annual basis going forward. Add to that additional growth from the planned shifts toward higher-margin IT service, networking and software businesses, and the picture gets brighter, Sacconaghi writes in a note to clients issued yesterday. HP, he argues, should be able to grow its per-share earnings by 9 to 10 percent annually over the next three to five years.

Part of his assumption is that HP uses about $4 billion of its $8-$10 billion in annual free cash flow for share buybacks, which will help goose earnings on a per-share basis by reducing the number of outstanding shares; plus another $3 billion annually for acquisitions, buying companies at reasonable multiples of about five times revenue.

So how does each sector of HP’s business look?

PCs: Sacconaghi reckons that the global market for PCs will grow about 6 percent a year on a unit basis, down from historical averages of about 10 percent, and that it will grow on a revenue basis by about 2 percent a year through 2015. As the biggest supplier of PCs in the world, HP will, at the very least, hold its market share. While PCs are HP’s largest business, accounting for $40 billion in its last fiscal year and about one-third of its overall sales, the unit generates only 13 percent of operating profits. And, yes, while tablets are a threat, Sacconaghi sees no reason that PCs and tablets can’t grow together. The increasing need for an Internet connection everywhere and the increasing amount that consumers are willing to spend on technology, coupled with price declines over time, mean that consumers will be willing to spend more on notebooks and tablets.

Printers: As with PCs, HP is the market leader in printers, and as that market grows its revenue by about 3 percent a year, HP will probably hold on to its share of the market. Tablets may have a long-term impact on printing behavior, but Sacconaghi argues that consumer behavior tends to change slowly. A decade ago, he says, investors worried that email and the paperless office would kill printing. “Despite these ostensible headwinds, HP and Lexmark collectively grew their supplies revenues by 7 percent per year between 2000 and 2010, driving low to mid single digit growth for the printer industry.” HP’s printer division accounted for $25.8 billion in revenues in the last fiscal year, or about 20 percent overall, and because of its 17 percent operating margin, delivered 29 percent of the company’s profits. It’s a classic razor blade business, as HP loses between 20 and 25 percent on the printing hardware, only to make it up on supplies that command a 60 percent margin. The presence of tablets could actually boost printing, and thus increase the sale of those supplies down the road. Overall, the printer business should continue to grow at about 3 percent a year, Sacconaghi says.

Enterprise, servers, storage and networking: Sacconaghi expects HP to grow revenues in the ESSN unit by about 2 percent a year, slightly below the industry growth rate of 3 percent. He bases this on the expectation that HP can grow its networking business, hold its market share in the Intel-based servers, and lose share in its enterprise storage business to players like EMC and NetApp, and also lose share in the Unix storage business because of Oracle’s decision not to support the Itanium chip.

Services: This unit should grow by about 2 percent annually, slower than the market, which is growing at 4 percent. “We believe that outsourcing is a maturing business, and that EDS, which HP purchased in 2008, is and was an underperforming asset,” Sacconaghi writes. “As a result, we forecast HP’s outsourcing revenues to remain flat.” Expect it to grow in line with the enterprise hardware business, and along with the consulting business.

Software: The market research firm IDC expects the end markets for HP’s software to grow by 7 percent a year. If you assume that HP makes more software acquisitions, which Sacconaghi does, then you can reasonably predict its software revenue will grow by 10 percent a year.

So what’s the risk to all this? Leadership. “Ultimately, our projections for HP are predicated on the company choosing a disciplined financial approach to running the company that includes modest revenue growth, small and leverageable acquisitions, a strong operations focus, and high returns of capital to shareholders,” Sacconaghi writes. The last two CEOs who tried to “transform” HP — Carly Fiorina and Léo Apotheker — failed.

HP’s isn’t “broken,” but in fact offers a favorable risk for patient investors, Sacconaghi says. He rates HP shares as an “outperform,” with a price target of $37.

Service offerings, such as managing E-ZPass highway-toll systems and supporting outsourced finance and accounting operations, continue to drive the Norwalk, Conn., company’s growth. Xerox also saw color-printer and supplies sales climb 9 percent, helped by the company working through a pile of orders that had mounted after Japan’s March earthquake and tsunami disrupted its supply chain.

Read the rest of this post on the original site »

HP shares have been bashed about in recent days, in no small part because of the dismal revenue outlook issued by rival Dell on Tuesday, and also on the heels of a downgrade by BMO Capital analyst Keith Bachman. Word that the TouchPad tablet isn’t selling well at Best Buy didn’t help. Dell shares gave up more than 10 percent of their value, and HP shares appeared to fall in sympathy by nearly four percent, closing at $31.39, or more than 36 percent off their 52-week peak.

So, what to expect? More lowered estimates, if Bachman is to be believed. In a note to clients Wednesday, Bachman cut his rating on HP to “market perform” from “outperform,” even though HP is trading at an inexpensive valuation. “Poor execution, low revenue growth and negative operating income growth” have caused him to slash his price target on HP to $36 from $43.

Bachman said he expects HP to fall short on PC sales, which may cause it to miss its previously issued revenue guidance. “We think HP will modestly miss July top-line estimates, and more meaningfully miss current top-line estimates for HP’s October quarter,” he wrote.

The consensus view of analysts calls for HP to report per-share earnings of $1.09 on revenue of $31.2 billion.

Chris Whitmore, an analyst at Deutsche Bank, wasn’t quite so dour as Bachman, though he wasn’t exactly whistling Dixie about HP’s prospects, either. Saying he expects HP to report results that are in line with the consensus expectations, Whitmore wrote in an Aug. 14 note to clients that he sees a “modest risk to revenue expectations.” The continuing investment to beef up HP’s investment in the services business will put some pressure on future earnings potential, Whitmore worries.

Citing checks of HP’s supply chain and distribution channel, Shaw Wu of Sterne Agee said in a note to clients yesterday that he thinks HP will “meet or exceed” the consensus estimates, and that, as in recent quarters, enterprise hardware sales will be stronger than consumer PC and device sales. “We believe this favorable product mix, in addition to lower component costs, should benefit gross margin,” he wrote. At least there’s one vote of confidence.

Back to services for a moment. HP’s long-term strategy has been to transform itself into a bigger player in IT services, so that it can rely less on sales of personal computers and printers, both of which are subject to violent sales-cycle swings. It’s a strategy that worked out well for IBM, and the $14 billion acquisition of EDS in 2008 was a key part of it.

During HP’s last earnings call in May, Apotheker grumbled that under previous CEO Mark Hurd, now a president at Oracle, HP “over-executed operationally and under-invested strategically.” Essentially, Apotheker blamed Hurd — known as an aggressive cost-cutter — for cutting too deeply without making sufficient investments to fuel growth in higher-profit lines of businesslike services. As a result, Apotheker explained, some expensive investments would be needed over the next several quarters to get that services business where it needs to be, and these investments would eat into results for the next several quarters. (You can hear him explain it himself in a CNBC video from May, below.)

It will be interesting to see if that “Hurd’s fault” narrative is still on the table. If it is, it’s not likely to fall on sympathetic ears. In his downgrade note, Bachman at BMO criticized HP harshly for pressing this message. “We suspect that management will make the point that previous management cut HP too much. However, previous management did not provide guidance, and then miss for three quarters, particularly right after having an analyst event. We would leave blaming the previous administration to politicians — it does not work with investors.” Ouch.

Certainly the hardware and OS seem formidable enough to at least differentiate the device in an increasingly crowded market. And if HP’s integration story proves to be as good in practice as it sounded on stage in San Francisco yesterday (printers, phones, PCs and tablets all connected via webOS), the TouchPad could mount a decent challenge to the iPad–even if it doesn’t arrive at market until after the debut of the iPad 2.

Though he feels the summer ship date is just too late, Barclays analyst Ben Reitzes was impressed by the TouchPad’s hardware and OS. “[The TouchPad] appears to have very good software and syncing capabilities (HP Synergy feature) and some promising features,” he said in a client note today. “Also we point out that HP is clearly still investing not just in tablets but its smartphone business, which provides a good link between products for the future. Along with a nice OS, we believe that HP’s channel strength, link to its printing franchise, and overall brand strength could enable it to be one of the few relevant tablet players far behind Apple over the long-term.”

J.P. Morgan’s Mark Moskowitz had good things to say as well. “Our initial take on the TouchPad: better than expected,” he said. “Beyond Apple’s iPad, we previously had not been impressed with the other tablet entrants. HP’s TouchPad moderately changes this view.”

Interstingly, Moskowitz doesn’t seem quite as concerned about the device’s launch date. His feeling is that with the TouchPad, HP isn’t taking on Apple as much as it is the conga line of vendors chasing it. “For HP,” he said, “we believe the initial mission is to capture meaningful share among the non-iPad tablets, i.e., Android and Windows-based devices.”

Which is an interesting way of looking at the company’s strategy. Perhaps HP isn’t trying to out iPad the iPad–it’s trying to out iPad the iPad’s imitators, a far less daunting task.