February 21, 2013
HP ends red ink overall, but BCS tumbles
HP is likely to remain intact for a long time, based on the comments from its CEO Meg Whitman at the latest quarterly report briefing. "The patient shows signs of improvement," she told an audience of analysts and the press. "We did better than we expected we would, and I think we should be encouraged by that."
Even though the company halted its quarters of red ink at two — Q1 delivered a profit of $1.2 billion, compared to the loss of $8 billion in the previous quarter — the top management delivered a dire report on business server enterprises at HP. Sales dropped company-wide by 6 percent to $28.4 billion. Its Enterprise Group sales fell $245 million, led by the continuing troubles at the Business Critical Systems unit.
"Our server business has a particularly strong market position in EMEA," said CFO Cathy Lesjak, "and the economic backdrop of that [region] is still dismal. The Itanium challenges within BCS are also still with us. There are key challenges still out there."
Lesjak said the news from the PC group — which HP said it has no plans to spin off — couldn't even meet HP's hopes. "Frankly, the business deterioration we are seeing in Personal Systems — particularly in EMEA and with notebooks — is worse than we expected."
One analyst on the call noted that the profit margins for the Enterprise Group have dropped for nine straight quarters. He wanted to know why, and Whitman laid the first pile of blame upon Business Critical Systems, the unit where HP sold 3000s until it dropped the server 10 years ago.
"The negative factor is the decline of BCS," Whitman said. "It was a big and profitable business, and you see that it's declined by 24 percent year over year. The good news is that we've got the best product lineup we've had in a long time in [the Enterprise Group.]" Whitman went on to note that HP is making investments behind the Enterprise lineup.
"R&D is the lifeblood of this business," she said of HP's enterprise products such as HP-UX servers and storage. Whitman believes that the enterprise customers will bring along Technical Services business to improve HP profits overall.
So how did the company turn a profit for the period? It didn't have to write off the value of Autonomy this time around, or subtract the valuation (through a goodwill writedown) of its Enterprise Services Group. Those were multi-billion-dollar hits in the last two quarters, including $8.8 billion in the previous quarter alone.
Even though Whitman called 2013 "a fix and rebuild year," the company still expects to be delivering $3.40 a share in fiscal year profits. That amounts to $6.6 billion HP believes it will earn using non-Generally Accepted Accounting Practices. These non-GAAP numbers are usually twice as high as accepted numbers. It still adds up to billions in profits for a year where HP says it's going to remain a single company.
"We have no plans to break up the company," Whitman said. "I feel quite strongly that we are better and stronger together." She believes that the past 10 years of business has built "the most valuable franchise in IT, particularly as we look forward to the most significant change in how IT is bought, paid for and consumed. We have a terrific set of assets, and we're going to drive that to really great business performance."
Even though HP's PC business contributes only 10 percent of the company's total profit, Whitman managed to spin that number into a positive. HP thinks pricing for PCs is going to be a problem, so it's glad that PCs only contribute a minimal share of earnings. The CEO thinks there's a better road ahead for an HP that remains intact.
"Customers want this company to be together," she stressed. "We heard that loud and clear on August 18, 2011." That was the day when HP released a quarterly report that it was studying a PC-Enterprise breakup. Shareholders sold down the stock that week on the news, along with the damage of dumping CEO Mark Hurd.
The return to black ink on HP's reports is a good sign about the company's futures, Whitman said. "The turnaround is on track. We have three more quarters to go in this year. We feel very confident about delivering the full year results. But we have to deliver, and we have to execute as an organization."
HP executed 3,500 employee departures in the first quarter, and it reduced its headcount by 11,800 in the fiscal year that ended in October. "We've now asked 15,300 people to leave the company," Whitman said. "We can actually see savings from that, and see a more streamlined and focused organization. This is the financial capacity we will need to hit our numbers. And it's the financial capacity we will need to invest."
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