Hewlett-Packard’s Profit Tops Estimates on Server Demand

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HP Server Tower
Stronger demand for corporate servers helped blunt the impact of sales declines in all of HP’s business units in the recent quarter. Photographer: Jacob Kepler/Bloomberg

Hewlett-Packard Co. reported fiscal second-quarter profit that exceeded analysts’ estimates as corporate spending on servers picked up ahead of the computer maker’s planned separation into two companies.

Profit before certain items was 87 cents a share in the period that ended in April, the company said Thursday in a statement. Analysts on average had projected 86 cents a share, according to data compiled by Bloomberg. Hewlett-Packard also said it may take charges of as much as $3 billion related to restructuring and the split over three years.

“We executed well in a tough market environment and a couple of our businesses did very, very well,” Chief Executive Officer Meg Whitman said in an interview.

Hewlett-Packard’s main businesses -- selling servers, software and personal computers -- have been weakened by the twin forces of cloud computing and mobile devices, which let corporations use less on-premise technology. The company is splitting into two entities -- one selling PCs and printers, and the other supplying technology to businesses -- by the end of the year, seeking to become more responsive in each market.

To shore up growth in the meantime, the company has released new mobile devices targeted at businesses, and acquired wireless-networking company Aruba Networks Inc. to help it compete with Cisco Systems Inc. Stronger demand for corporate servers helped blunt the impact of sales declines in all of the company’s business units in the recent quarter.

Enterprise Acquisitions

After the breakup, the enterprise company will seek to make more acquisitions, Whitman said.

“There’s very interesting things out there that we want to acquire over time,” she said. The company is unlikely to purchase software assets in the near term, she said, because “we have a lot more to do to optimize the portfolio that we have.”

Hewlett-Packard filled in some executive appointments for the post-split businesses. Cathie Lesjak, the company’s chief financial officer, will become the CFO of HP Inc., the PC and printer company. Lesjak, who was briefly Hewlett-Packard’s interim chief executive officer, has traditionally worked closely with Whitman, who will take that role at the enterprise business after the split.

Chris Hsu, a senior executive in operations, will become chief operating officer of Hewlett Packard Enterprise, overseeing real estate, procurement and business processes, the company said Thursday.

Tim Stonesifer, currently CFO of Hewlett-Packard’s enterprise group, will take that position at Hewlett Packard Enterprise. Alan May is also joining that business as head of human resources from Boeing Co., where he held the same position in the commercial airplanes division.

Restructuring Costs

On a conference call, Lesjak said the company may reduce costs at the two companies by about $1 billion over three years, and sees potential to take an additional $2 billion in costs out of the company’s Enterprise Services business during that time. She wasn’t more specific. Those cost cuts would result in charges of a similar amount, she said. The company is approaching the completion of a restructuring program it began in 2012 that has so far included about 48,000 job cuts.

Hewlett-Packard shares rose about 1.6 percent following the report. They gained 2.3 percent to $33.83 at the close in New York, leaving them down 16 percent this year.

Sales Decline

Second-quarter sales shrank 6.8 percent to $25.5 billion, compared with analyst projections for $25.7 billion, according to data compiled by Bloomberg. Net income fell 21 percent to $1.01 billion from $1.27 billion a year earlier, the Palo Alto, California-based company said.

All of Hewlett-Packard’s units posted revenue declines in the quarter. Personal systems group sales fell by 5.3 percent, and printer unit revenue dropped 7 percent. Enterprise group sales slipped 1 percent, buttressed by an 11 percent rise in sales of industry-standard servers.

“I don’t see many bright spots,” said Dan Morgan, a senior portfolio manager at Synovus Securities Inc., which owns 288,020 shares of the company.

Cash flow from operations was $1.5 billion, down 51 percent from a year earlier. The company is maintaining its free cash flow forecast for fiscal 2015 at $3.5 billion to $4 billion, Lesjak said in an interview.

Third Quarter

For the third quarter, which ends in July, profit before certain items will be 83 cents to 87 cents a share. Analysts on average had projected 87 cents, according to data compiled by Bloomberg.

Since announcing its intention to split in October 2014, Hewlett-Packard has faced global weakness in the PC market and rapid growth in cloud computing, where lower-cost server makers are winning data-center business. Investors expect HP Inc. to generate reasonably predictable results -- barring major success for in-development areas, like 3-D printing, according to Jayson Noland Sr., a senior analyst at Robert W. Baird & Co.

“It’s not a growth business, but they’ll continue to make money,” he said. Hewlett-Packard Enterprise, the corporate-focused business, will be a more unpredictable buy, he said. “There’s growth in enterprise but there’s also a significant level of change.”

Seeking Growth

To improve the prospects of its enterprise arm, Hewlett-Packard acquired Aruba Networks for about $2.8 billion in cash to bolster its networking business.

Earlier Thursday, the company said it sold a majority stake in its networking-focused H3C Technologies unit and its China-based server, storage and services business to a group owned by a Chinese University, and took a stake in that new entity to help it continue to sell in a country whose government is mandating that companies pare technology purchases from Western providers. Hewlett-Packard will distribute the networking products made by the joint venture to the rest of the world.

“They will not be selling any of the products developed within China to the rest of the world except through us,” Lesjak said on the call.

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