HP Rises as Profit Tops Estimates; 27,000 Jobs to Be Cut

Photographer: F. Carter Smith/Bloomberg

Hewlett-Packard Co. employees works at the HP Factory Express facility that builds and tests custom servers and data storage units, in Houston, Texas, 2007. Since then, they have lost market share and will cut 27,000 jobs. Close

Hewlett-Packard Co. employees works at the HP Factory Express facility that builds and... Read More

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Photographer: F. Carter Smith/Bloomberg

Hewlett-Packard Co. employees works at the HP Factory Express facility that builds and tests custom servers and data storage units, in Houston, Texas, 2007. Since then, they have lost market share and will cut 27,000 jobs.

Hewlett-Packard Co. (HPQ) rose the most in eight months after the world’s largest personal-computer maker announced plans to slice its workforce by 27,000 and reported quarterly sales and profit that topped estimates, buoying optimism for a turnaround.

Profit before some costs in the second quarter, which ended April 30, was 98 cents a share, the company said in a statement yesterday. That compared with analysts’ 91-cent average estimate, according to data compiled by Bloomberg. Sales were $30.7 billion, beating the average projection of $29.9 billion. The shares jumped as much as 12 percent in extended trading.

Chief Executive Officer Meg Whitman is cutting jobs and streamlining businesses as Hewlett-Packard grapples with slower demand for printers, services and data-center equipment, leading to a third-quarter profit forecast that was less than analysts predicted. The 8 percent workforce reduction, taking place through firings and early retirement offers, will generate annual savings of as much as $3.5 billion starting in 2014.

“This is the first step in the recovery process,” said Brian Marshall, an analyst at ISI Group in San Francisco. Shares of other business technology companies such as Dell Inc., NetApp Inc. and Cisco Systems Inc. have declined this month on reports of lower demand, while Hewlett-Packard’s stock has already reflected much of the bad news, he said.

“HP is looking like a good place to park some money,” Marshall said. “Those guys have already been taken behind the woodshed.”

‘Re-engineering’

Hewlett-Packard’s shares rose 4.8 percent to $22.09 at 9:36 a.m. in New York, and earlier touched $22.66 for the biggest intraday increase sine Sept. 27. The stock had dropped 18 percent this year before today.

Whitman said the reductions are part of a “re- engineering” of Hewlett-Packard aimed at paring the number of products sold, simplifying pricing and advertising more effectively. She doesn’t expect further job cuts.

“This is quite different from the cost-cutting that Mark Hurd undertook,” Whitman said in an interview yesterday. “This is about fundamental business-process re-engineering.”

Hurd, Hewlett-Packard’s CEO from 2005 to 2010, oversaw a period of rising profit and share price at the company while announcing at least 48,000 job cuts.

PC Sales

Second-quarter PC sales were little changed from a year earlier, while sales of printers and ink declined 10 percent. Revenue from servers, data-storage devices and networking equipment fell 6 percent, and services revenue dropped 1 percent, the company said.

Net income in the period fell 31 percent to $1.59 billion, or 80 cents a share, from $2.3 billion, or $1.05, a year earlier. Sales in the year-earlier period were $31.6 billion.

Whitman, CEO since September, is struggling with a turnaround effort aimed at reducing costs and reversing a sales slump that led to the ouster of her predecessor, Leo Apotheker. She has said the company needs to make its products and services more competitive and spend more on research and product development.

On a conference call with analysts, Whitman said she’s “cautiously optimistic” about the progress Hewlett-Packard has made on her watch.

“Turning HP around is going to be a lot of hard work,” she said. “It’s going to take time.”

Third-Quarter Forecast

For the fiscal third quarter, which ends in July, profit excluding certain items will be 94 cents to 97 cents a share, Palo Alto, California-based Hewlett-Packard said in the statement. That compares with the $1.02 average of analyst estimates compiled by Bloomberg. The company didn’t provide a third-quarter sales forecast. Analysts expect a 3.1 percent decline to $30.3 billion.

“IT spending is slowing,” said Brian White, an analyst at Topeka Capital Markets in New York, who recommends holding the shares. Savings from the job cuts could counter some of the other challenges facing Hewlett-Packard, he said. “If you go through the metrics, they’re just very inefficient.”

For the fiscal year, Hewlett-Packard forecast profit before costs of $4.05 to $4.10 a share, higher than analysts’ projections for $4.02. The company said it will have pretax costs of about $1.7 billion in fiscal 2012 as a result of the restructuring.

Services Job Cuts

The improved annual outlook is the result of some cost savings the company will begin to see in the fourth quarter, Chief Financial Officer Cathie Lesjak said in an interview.

The staff reduction will pare Hewlett-Packard’s workforce of 349,600. A third of the cuts will take place in the U.S., according to a person with knowledge of the plans, who declined to be identified because the breakdown hasn’t been disclosed.

The enterprise services group will take a larger number of job cuts than other groups, said Lesjak, though she declined to specify the number.

“This wasn’t a peanut-butter spread,” she said in an interview yesterday. Last week, people familiar with the matter said the company plans to reduce its services workforce by 10,000 to 15,000 people. That business expanded when Hewlett- Packard bought Electronic Data Systems Corp. for $13.2 billion in 2008. No unit of the company will be spared, Lesjak said.

‘Every Business Unit’

“Every business unit, every function and every region has a role to play here,” she said.

The services unit competes with International Business Machines Corp., Infosys Ltd. and others in the market for managing companies’ IT operations. Yet the growth in the services market has shifted away from the labor-intensive outsourcing contracts that made up most of EDS’s sales, the company has said.

Customers want help modernizing business applications, retooling data centers for Internet-delivered cloud-computing software, and analyzing reams of data. Hewlett-Packard doesn’t have enough experts in those areas to win deals, former CEO Apotheker and other executives have said.

Still, the job cuts could take years to improve profits, Katy Huberty, an analyst at Morgan Stanley in New York, said in a May 17 research note.

“We view any restructuring announcement as a positive move, but one that will take several years to sustainably improve margins, EPS and free cash flow,” she said.

Boosting R&D

Whitman has said the company also needs to boost R&D spending, which was $3.25 billion in the last fiscal year. ISI Group’s Marshall said in a research note last month the company ought to spend $4 billion to $5 billion on R&D to compete with IBM and Cisco Systems Inc. in developing new products for corporate data centers.

At the company’s Discover conference in Las Vegas next month, Hewlett-Packard will discuss new computer-security software that integrates the functions of various products it has acquired, Whitman said yesterday. The company is also investing more in the quality and design of its PCs.

“The days are over when you’ll have one set of devices at work that aren’t particularly appealing and one set of devices at home that are,” she said.

In the PC market, Hewlett-Packard is fighting Apple Inc.’s rising market share for its Mac computers and iPad tablet. Hewlett-Packard’s report follows No. 3 PC maker Dell Inc.’s forecast earlier this week for lower-than-projected sales for the quarter ending in July, as demand for smartphones and tablet computers erodes PC sales.

Tablet Boom

Tablet sales are cutting into those of traditional laptops: 118.9 million tablet devices will be sold in 2012, almost doubling from 2011, according to market-research firm Gartner Inc., with Apple accounting for 61 percent of the market. PC shipments worldwide will rise 4.4 percent to 368 million this year, Gartner estimates.

Hewlett-Packard also said former Autonomy Corp. CEO Mike Lynch will leave the company after “a significant decline in license revenue” at the Autonomy unit, which was acquired last year for $10.3 billion. Chief Strategy Officer Bill Veghte will lead the unit, which makes software for analyzing business data.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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