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Hewlett-Packard Plunges as Whitman Projects Profit Drop

Oct. 3 (Bloomberg) -- Jon Erlichman reports on HP's stock plunge. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

Hewlett-Packard Co. (HPQ) Chief Executive Officer Meg Whitman forecast 2013 profit that missed estimates and said a turnaround at the computer maker won’t happen any time soon, sending shares to the lowest price in a decade.

“The recent financial performance of HP has not been good,” Whitman said at a meeting with investors. “It’s going to take longer to right this ship than any of us would like.”

Whitman, one year into her tenure leading the world’s largest PC maker, said that the company lacks a “sharp, competitive focus” and needs to concentrate on fewer products. Hewlett-Packard is trying to boost profit by cutting jobs and reviving sales with multi-featured machines, including printers that double as scanners and copiers, as well as servers that combine computing, storage and networking -- efforts that Whitman said may start to bolster earnings after next year.

“It’s brutal -- it’s really, really negative,” Brian Marshall, an analyst at ISI Group, said in an interview. “They’ve been very transparent. The problem with transparency is when they open up the full picture, it’s pretty ugly.”

Hewlett-Packard fell 13 percent to $14.91 in New York, the lowest close since November 2002. The stock has lost 35 percent since Whitman was named CEO on Sept. 22, 2011. Shares of rival PC maker Dell Inc. (DELL) dropped 4.8 percent to $9.43, the lowest closing price since March 2009.

Forecast Miss

Earnings excluding some items for the 2013 fiscal year, which begins next month, will be $3.40 to $3.60 a share, the Palo Alto, California-based company said today in a statement. Analysts on average had estimated profit of $4.16 a share, according to data compiled by Bloomberg.

Whitman, the sixth CEO since 2005, including interims, presided over her first full-day meeting with financial analysts and investors. She was joined Chief Financial Officer Cathie Lesjak and executives responsible for each of the company’s major business units, including enterprise services, printing, hardware, software and cloud-computing.

Next year will be a “fix and rebuild year,” Whitman said. “Innovation is actually alive and well at HP. We need to work a lot harder to get those ideas productized and commercialized and into the market much faster.”

The push to boost sales to corporate customers comes as China’s Lenovo Group Ltd. (992) is poised to supplant Hewlett-Packard as the top PC supplier. Its share of PCs dropped to 14.9 percent in the second quarter, while Lenovo’s increased to 14.7 percent, according to Gartner Inc.

Research Spending

The PC market will expand less than 1 percent this year -- the worst performance since it shrank in 2001 --according to IDC, complicating Whitman’s turnaround effort. PCs may not grow until 2016, said Todd Bradley, head of Hewlett-Packard’s printing and PC business.

Whitman has been spending more on research and development and directing funds toward areas of the computing market where she says Hewlett-Packard can gain an edge, including managing growing volumes of business data and helping companies transition to cloud-computing over the Internet.

While the research investment may pay off down the line, it’s partly responsible for the unexpected profit drop Hewlett- Packard projected for 2013, said Amit Daryanani, an analyst at RBC Capital Markets.

“Demand continues to get worse while HP continues to increase its investments in R&D,” Daryanani said in a research report today. “Things will get more challenging before they get better.”

Cloud Growth

In the enterprise computing market, Oracle Corp. (ORCL) is creating a cloud service that lets companies rent processing power, storage, database software and business applications from the company instead of buying them outright, a threat to Hewlett-Packard’s server and disk drive businesses.

Microsoft Corp. (MSFT), International Business Machines Corp. (IBM) and VMware Inc. (VMW) are also vying to supply more of the platform software that can help companies switch to cloud computing.

Bill Veghte, Hewlett-Packard’s chief operating officer, said in the statement that cloud revenue grew 39 percent to almost $4 billion in 2012 and would reach $8.4 billion by 2015.

Dave Donatelli, who leads the enterprise unit, said the company is developing data-center products such as a computer system that combines servers, storage and networking in the same chassis. The approach would borrow from Hewlett-Packard’s Project Moonshot systems, which let customers cram thousands of computing cartridges into a machine to attack Web serving and data-analysis problems.

Tablet Market

In the tablet market dominated by Apple Inc. (AAPL)’s iPad, Hewlett-Packard is seeking to appeal to corporate clients with an emphasis on security, durability and the ability to run business applications. Hewlett-Packard said it will introduce a tablet for business users, the ElitePad 900, in January that runs Microsoft’s Windows 8 software.

Whitman has announced plans to cut 29,000 jobs by the end of fiscal 2014 to save as much as $3.5 billion a year. Many of the reductions are from the company’s underperforming enterprise services unit, which former CEO Mark Hurd added with the 2008 acquisition of Electronic Data Systems. In August, Hewlett- Packard said it would write down the value of that business by $8 billion.

Revenue from enterprise services will drop as much as 13 percent in the next fiscal year, Hewlett-Packard said, citing “exceptional runoff in four major accounts and selective pursuit of deals.”

At the same time, enterprise software is growing, helping Hewlett-Packard gain share in a market it said will be worth $54 billion by 2015.

To contact the reporter 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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