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HP's Whitman Aims to Rebuild

(Bloomberg) — Meg Whitman, who took over as Hewlett-Packard Co.’s chief executive officer two months ago, used her first earnings conference call to tell investors they need to lower their expectations.

Hewlett-Packard’s first-quarter profit forecast and full-year earnings outlook both missed analysts’ estimates—a sign the company is still reeling from a technology-spending slump that led to the ouster of Whitman’s predecessor, Leo Apotheker.

The new CEO’s prescription for fixing Hewlett-Packard’s ailing businesses, such as personal computers and information-technology services, includes boosting research spending and limiting the size of acquisitions. The idea is to conserve cash and spur homegrown innovation, something the company neglected over the past decade. She said she’ll unveil more plans in the first half of next year.

“This is much bigger than just the quarter,” said Brian White, an analyst at Ticonderoga Securities LLC in New York, who has a “neutral” rating on Hewlett-Packard shares. “You’ve got a company that underwent years of underinvestment. They’ve got markets like PCs that are running into headwinds. And you’re seeing increased competition in the IT market.”

Hewlett-Packard slipped 2.3 percent in late trading yesterday after the report. The stock, which closed at $26.86 earlier in the day, had already tumbled 36 percent this year.

Slow growth in Europe and the Americas will weigh on results next year, even as Asia looks more promising, Whitman said yesterday in an interview.

‘Relatively Pessimistic’

“We’re relatively pessimistic about the economic outlook in two of our three major regions,” Whitman said. “2012 just looks tough to me.”

Profit for the quarter ending in January will be 83¢ to 86¢ a share, excluding some items, the company said in a statement yesterday. The average estimate of analysts surveyed by Bloomberg was for $1.11 a share.

Excluding certain items, profit will be at least $4 a share in fiscal 2012, which began Nov. 1, Hewlett-Packard said. That missed the average forecast for profit of $4.58.

In the fourth quarter, which ended Oct. 31, Hewlett-Packard suffered declines in its printing, PC and server divisions, hurt by consumers and businesses curtailing spending. Apotheker was replaced on Sept. 22 after slashing forecasts three times in less than a year and jarring investors with a proposal to spin off the PC unit. The profit outlook for this quarter and fiscal 2012 show that Whitman has a more realistic sense of the company’s challenges, said Chris Whitmore, an analyst at Deutsche Bank AG in San Francisco.

Reachable Goal?

“Estimates now are at a level where they can hit rather than missing, which they developed a track record of doing,” said Whitmore, who has a “sell” rating on Hewlett-Packard.

Whitman told Wall Street analysts she plans to eschew large acquisitions next year, rebuild the company’s balance sheet and reduce the amount of “drama” at the company after Apotheker’s ouster.

“HP is getting back to business fundamentals in 2012,” she said during a conference call with analysts. “No more surprises.”

Fiscal 2011 profit was dragged down by after-tax one-time costs of $3.3 billion, or $1.56 a share. An August decision to stop making devices sporting WebOS, gained in last year’s $1.2 billion acquisition of Palm Inc., accounted for $1.64 billion of the expenses.

December Decision

The company was losing money on each TouchPad tablet it sold, prompting the move. Hewlett-Packard will make a decision about what to do with the WebOS software by early December, Whitman said in the interview. She will present her overall strategy to investors some time in the first half of 2012.

Fourth-quarter profit was $1.17, excluding some items. That exceeded the $1.13 estimate. Sales of $32.1 billion matched analysts’ projections. Results were buoyed by a 9 percent sales increase in the so-called BRIC countries—Brazil, Russia, India and China—that partly made up for declines in the U.S. and Europe.

Consumer spending remains soft and businesses are beginning to slow purchasing, Chief Financial Officer Cathie Lesjak said on the conference call.

Whitman, former CEO of online-commerce pioneer EBay Inc., is reversing some of the strategies pursued by Apotheker. She said on Oct. 27 that she’ll keep the PC business in house, and she’s sharing management responsibilities with Executive Chairman Ray Lane.

Autonomy Deal

At the same time, she’s working to integrate Autonomy Corp., a British software maker purchased by Hewlett-Packard under Apotheker. The $10.3 billion deal, unveiled Aug. 18, added to Hewlett-Packard’s debt.

The company doesn’t plan “large M&A” next year, though it may seek small software deals, Whitman said on the call. It likely won’t pursue targets more expensive than $500 million, she said. The company had $8 billion in cash on Oct. 31, compared with $10.9 billion a year ago.

“We need to rebuild our balance sheet,” she said. “Software may be the one area where there are some assets ready to move.”

Hewlett-Packard also plans more spending on research and development, Whitman said in the interview. The company spent 2.6 percent of sales on R&D in the fourth quarter, down from more than 4 percent seven years ago, according to Bloomberg data.

‘Biggest Brainiacs’

“We are still underinvested in almost every major segment,” she said. To help spur innovation, HP Labs director Prith Banerjee now reports directly to the CEO. Whitman also plans to spend a day in December meeting with researchers—”some of the biggest brainiacs in the business,” she said.

Hewlett-Packard faces other challenges. Like rival Dell Inc., it’s coping with flooding in Thailand, which has crimped the world’s supply of disk drives used in PCs. A decision by competitor Oracle Corp. to stop developing software for Intel Corp.’s Itanium chip is leading to sales declines in Hewlett-Packard servers that use the chips. In June, Hewlett-Packard filed a lawsuit in California against Oracle over its decision.

On Nov. 17, the company appointed activist shareholder Ralph Whitworth to its board. Whitworth, whose investment firm oversees $6.5 billion, told management his appointment would burnish credibility and that he’d press for share buybacks, higher dividends or more investment in research, a person with knowledge of the situation said.

“We’ve created confusion among many of our shareholders about what kind of company HP is,” Whitman told analysts. “We’ll be doing the hard work that will position us for consistent, profitable growth in 2013 and beyond.”

Ricadela is a reporter for Bloomberg News and Bloomberg Businessweek in Frankfurt.

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