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Tumbling PC sales, writedown push HP into quarterly loss

PUBLISHED : Thursday, 23 August, 2012, 9:19am
UPDATED : Thursday, 23 August, 2012, 12:12pm

Hewlett-Packard Co swung to an US$8.9 billion quarterly loss as personal computer sales shrank again and it swallowed a huge write-down linked to its US$13.9 billion purchase of Electronic Data Systems Corp.

The company also on Wednesday reduced its full-year earnings outlook slightly to the low end of its previous range, responding to a faltering PC market as well as touch economic conditions in Europe and also China, where growth too is slowing. Its shares slid more than 4 percent in late trading.

The No.1 personal computer maker, which employs more than 300,000 people globally, is undergoing a multi-year restructuring aimed at focusing the sprawling corporation on enterprise services, in the mould of IBM. The plan calls for reducing its employee base by 8 percent.

HP will have gone through about half of its targeted job reductions by the end of the fiscal year, HP’s Chief Financial Officer Cathie Lesjak said in an interview. It cut 4,000 jobs in fiscal third quarter and will likely have shorn 11,500 jobs by end of fiscal 2012, she said.

“HP is definitely showing progress in terms of turning around the company,” said Sterne Agee analyst Shaw Wu. “One of the clear signs is a better predictability of earnings.”

The company was plagued by poor forecasting during former Chief Executive Leo Apotheker’s brief tenure.

CEO Meg Whitman has urged investors to be patient as she works to jumpstart revenue and cut costs.

“We are still in the early stage of the turnaround. There will be challenges ahead that could create some variability in performance,” said Whitman, who replaced the unpopular Apotheker at the helm in September. “But I’m confident in our ability to work through them and get to where we want to be.”

The world’s largest PC maker posted a 5 percent slide in net revenue in its fiscal third quarter to US$29.7 billion, slightly below the average Wall Street estimate of US$30.1 billion as compiled by Thomson Reuters I/B/E/S.

It took a charge of US$10.8 billion, mostly related to the writedown of its EDS services business, which it had announced earlier this month.
HP, which like smaller rival Dell Inc is struggling to offset faltering PC sales with services revenue, posted a net loss of US$4.49 a share in its fiscal third quarter that ended July 31, versus a profit US$1.9 billion, or 93 US cents a share, a year earlier.

Both HP and Dell are struggling to defend their PC market share from Asian rivals such as Lenovo and Acer .

Excluding items such as the writedown, it earned US$1 a share, outstripping Wall Street’s target of 98 cents. The stock fell to US$18.35 in after-hours trade on Wednesday, down 4.4 per cent from its US$19.20 close in regular trading on the New York Stock Exchange.

Wall Street has so far adopted a wait-and-see approach to Whitman’s restructuring plan but is concerned with the continued decline in revenue. HP has lost close to a quarter of its market value in 2012. Its shares are down about 15 per cent from when Whitman was appointed to the helm in September of last year.

The massive quarterly loss was expected as the company said earlier this month that it would take a noncash charge of US$8 billion, primarily writing down the value of its 2008 acquisition of EDS for US$13.9 billion.

Revenue from all of HP’s main business units fell, with the personal computer division unsurprisingly recording the steepest drop of 10 per cent, to US$8.6 billion.

Services revenue dipped just 3 per cent to $8.8 billion, edging past Personal Systems Group -- which includes PCs -- to become the company’s largest sales generator in the quarter that ended July 31.

HP’s business continued to be hit by a slowing economy in most of its biggest regions, including Western Europe and China.

The “pretty soft underlying macro economic environment” is continuing into the current quarter, Lesjak said but added that there were some “bright spots” such as Eastern Europe and Japan.

In personal computers, HP is facing both a weak consumer market and competitive pricing, Lesjak added.

HP is also revamping its enterprise services unit, which caters to corporations. Whitman said HP is changing the leadership structure in the unit to bring more accountability and moving away from offering low-end services, an area that EDS specializes in.

In an effort to jumpstart change, the company in May appointed George Kadifa, formerly from private equity firm Silver Lake, as head of the division.

HP said it expected to earn US$4.05 to US$4.07 per share for fiscal year 2012. HP’s previous full-year estimate was US$4.05 to US$4.10.

Whitman also said she plans to makes small divestitures to cull the vast product line and focus on a narrower offering.

“Behind the curtain there’s lots of smaller initiatives that I think we can take those resources and get more bang for the buck by really investing behind some of our best growth opportunities,” Whitman said, adding that they wouldn’t be “big divestitures by any stretch of the imagination.”

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