August 20, 2012
Red-ink hawks circle HP's quarterly news
Somehow, HP expects to manage to take a declining PC business and an $8 billion writedown in the same quarter, pay for early retirement benefits while it cuts jobs, and then report profitability of about about $1 per share. It takes a sharper accountant's head than this business writer's to tote up PC sales reductions plus billions in a writedown and sum up to profitability. If HP hits its marks, the company would register more than $1 billion in profits for the period.
But that's still likely to be the lowest tally of earnings ever since HP purchased EDS for $13 billion and began to call it HP Services. News media company Berzinga published this forecast of HP's Wednesday afternoon numbers.
HP is expected to report that its fiscal third quarter profit fell 10.9 percent year-over-year to $0.98 per share. That EPS estimate inched up a penny per share in the past 30 days. Analysts have underestimated HP's EPS in the past seven quarters. The Palo Alto, California-based company, like Dell, has faced dwindling PC sales, and analysts on average expect revenue for the quarter to total $30.1 billion. That would be a year-over-year decrease of 3.5 percent. The company is scheduled to share its quarterly results late Wednesday.
Whether there will be red ink on HP's balance sheet for the first time in more than three decades, the company's reach into every aspect of computing looks like it's draining the profits pool at a record rate. Decisions to purchase Autonomy at almost $11 billion, plus that abortive entry into tablets with last summer's TouchPad have taken their toll -- all while the concept of selling datacenter-grade hardware into customer shops keeps losing traction. Cloud-sourced IT, or the near-shoring of computing, is sweeping into longer term planning. With its buy-ups and expansions, HP has become the largest IT datacenter company in the world. As one 3000 vendor who believes in the long term view says, "When you're the biggest, the only place you've got to go is down."That's an opinion from MB Foster's CEO Birket Foster, who's happy to weave economic analysis alongside IT planning. While HP's results will certainly show a continued drain of profits, Apple used this week to accomplish a fresh ranking as the highest-valued company in the world. But that $662 share price is not all datacenter business, even if Bring Your Own Device (of the handtop variety, as Foster calls it) has been driving enterprise user business growth. Apple's become a mobile computing company with ideals to tie all of its customers to an iCloud. However, it's got no Big Data or Business Intelligence products, or even a Services Unit like EDS that could bring along massive outsourcing contracts from the likes of Proctor & Gamble or Ford.
Of course, HP's Ford outsourcing business is now disappearing at the hands of departed HP CIO Randy Mott. Now the IT chief at Ford, Mott is bringing all computing back inside Ford's datacenters and away from HP's contract. Mott's mantra was centralization while he steered HP's own IT, consolidating 85 datacenters down to six.
Computer companies juggle complex choices to make while they try to maintain growth in profits and revenues. HP considered spinning off that PC business in the wake of the TouchPad disaster, but turned away. The details for such choices are hidden from even sharp financial analysts, although securities regulations demand some transparency. HP's troubles lie in a decade of poor decisions from its boardroom -- where becoming the largest vendor of IT seemed to be the main goal from Carly Fiorina's arrival through Mark Hurd's reign and even into Leo Apotheker's brief term.
Current CEO Meg Whitman has told the company that while it will shear off 27,000 jobs through 2014, HP's getting into fewer businesses. "My guess is that she's going to take a writeoff before the end of this year, so she can have a great year next year," Foster said. Some of the companies which HP bought, such as Autonomy and EDS, had a lot of services included, and those services have evaporated because there's a conflict. "If you're IBM, will you now buy Autonomy services once HP owns it?" Foster asks. A $5 billion purchase of Cognos in 2009 seems to block buying Big Data services from Autonomy, he suggests.
The Apple community is anticipating the demise of HP's laptop business as a factor in a red-ink quarter. iPads are on track to sell about 70 million units for 2012, while the rest of the industry's PC business has been fading. Dell's PC business has constricted so quickly the company has stopped calling itself a personal computing provider. Buy-ups like Quest hope to move Dell into the services arena.
The Associated Press moved a story today that predicts $9 billion in losses for the period which ended on July 31.
Facing up to its past mistakes is expected to saddle Hewlett-Packard with a quarterly loss of nearly $9 billion, the largest setback in the Silicon Valley pioneer's history.
The sobering results, due out after the stock market closes Wednesday, won't be a surprise. The company telegraphed the loss earlier this month when it disclosed it will absorb massive charges to account for an ill-advised acquisition and the initial costs of a streamlining program that will jettison 27,000 jobs to help boost HP's sagging profits.
Most of the damage stems from HP's $13 billion acquisition of technology consulting service Electronic Data Systems in 2008. The deal hasn't panned out the way that HP envisioned, forcing the company to write down the value of its Enterprise Services division.
HP also will record a charge of $1.5 billion to $1.7 billion to cover the severance payments to workers being pruned from the company payroll. The cuts, which will eliminate about 8 percent of HP's workforce, are being spread over the next two years.
On the other hand, HP has not shifted away from a forecast of August 8 predicting better than first expected profits.
HP is increasing its previously provided third quarter fiscal 2012 non-GAAP earnings per share (EPS) outlook to approximately $1.00 per share, up from a previous range of $0.94 to $0.97. Third quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs related primarily to the amortization and impairment of purchased intangible assets, goodwill impairment charges, restructuring charges and acquisition-related charges.
That AP financial writer's forecast which predicts that massive red ink fingers the EDS charges -- not laptop declines -- plus $1.5 billion in early retirement offers accepted that will pool the losses. These EER offers are being accepted at a rate that's surprising HP. What's working to help the HP numbers is reductions in costs.
Cost cutting is the main reason that HP fared slightly better during the latest quarter than management had anticipated. Add it all up, and it's expected to produce a loss of $4.31 to $4.49 per share during the three months ending in July. That translates into a loss of $8.5 billion to $8.9 billion, the worst quarterly showing since HP started out in a garage in 1939.
The AP writer thinks that investors will be more interested in the way Meg is restructuring HP than any single poor quarter.
Not many companies have never reported 51 successive years of black ink. By Wednesday we'll know if HP will maintain its string.
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