HP’s Slumping Businesses Signal Long Road for Turnaround

The roadblocks to Hewlett-Packard Co.’s turnaround are mounting.

Meg Whitman, hired as chief executive officer almost two years ago to revive the storied Silicon Valley computer maker, had said revenue would rise next year as personal-computer sales stabilized. She scrapped that prediction yesterday.

PC shipments are slumping for longer than Whitman had foreseen, there’s weak demand for enterprise hardware and services, and Dell Inc. and other competitors are siphoning away sales with aggressive pricing. Cost-cutting is also reaching its limit amid a move to eliminate 29,000 jobs. Whitman is still facing hurdles after three years of write-offs, management upheaval, strategy shifts and slowing growth.

“The signs are clear that 80 percent of their business will have headwinds in fiscal 2014 -- that’s PCs, printers, and services,” said Abhey Lamba, an analyst at Mizuho Securities USA Inc., who has an underperform rating on the shares, the equivalent of a sell. “Management had some bullish expectations about the environment and they’re not materializing now.”

Whitman took the helm in 2011, asking investors to be patient and scaling back her predecessor’s growth projections that she said were too cheery. The stock had risen 78 percent this year on signs that a turnaround may be taking hold.

Results for the fiscal third quarter showed revenue declines across most of Hewlett-Packard’s businesses, and the company’s forecasts for the period through October fell short of some analysts’ estimates.

Spending Environment

Earnings excluding some items will be 98 cents to $1.02 a share for the fiscal fourth quarter through October, the Palo Alto, California-based company said in a statement yesterday. Analysts were predicting $1.01 on average, according to data compiled by Bloomberg. For the 2013 fiscal year, earnings will be $3.53 to $3.57 a share, compared with the company’s previous forecast of $3.50 to $3.60.

Shares of Hewlett-Packard fell 12 percent to $22.22 at the close in New York, for the biggest decline since October.

In yesterday’s conference call with analysts, Whitman cited a “weak enterprise spending environment,” with sales challenged in Europe and China. Pointing to difficulties in Hewlett-Packard’s enterprise and PC businesses, she now projects that “year-over-year revenue growth in fiscal 2014 is unlikely.” Whitman had previously said she expects sales growth in the next fiscal year.

PC Slump

PC shipments fell in the second quarter for a fifth straight period, sliding 11 percent, market researcher Gartner said in July. Consumers are increasingly opting for tablets instead of traditional desktops and notebooks, and businesses are holding onto old machines for longer.

For the fiscal third quarter which ended in July, sales fell 8 percent to $27.2 billion, compared with analysts’ average estimate for $27.3 billion. Earnings excluding some items were 86 cents a share, compared with the average projection of 87 cents. Net income was $1.39 billion, compared with analysts’ $1.19 billion estimate.

Sales in the group that includes PCs fell 11 percent to $7.7 billion. Hewlett-Packard is missing out on three of the biggest trends in technology: The rise of smartphones and tablets, businesses’ move to online computing services from on-site hardware and software, according to Bill Kreher, an analyst at Edward Jones & Co., who rates the shares a sell.

“If HP could just convince the Street that they’re going to participate in any one of these trends, it would lead to a resurgence in revenue and profit growth,” Kreher said.

Management Shuffle

The enterprise division, which includes computer servers, data-storage devices and networking equipment, reported revenue shrank 9.4 percent to $6.79 billion in the fiscal third-quarter, while earnings before taxes fell 19.5 percent to $1.03 billion. Declines in the high-end servers and lucrative technology support services sapped profits, the company said.

Whitman is shaking up her team again, seeking to rescue the turnaround effort by promoting Chief Operating Officer Bill Veghte as head of the enterprise group, replacing Dave Donatelli. Henry Gomez, chief of communications, is replacing Marty Homlish as chief marketing officer.

Donatelli is leaving his job after prolonged tensions with Whitman, said people with knowledge of the matter. The appointments are the latest executive moves being made by Whitman. In June, she moved Todd Bradley, the head of the personal-computer and printer division to another job. Donatelli and Homlish are being given new roles.

Fresh Ideas

Whitman said in a statement she was shuffling management as the “industry is undergoing profound change and you need to rapidly respond with fresh ideas and bold execution.”

Veghte, a former Microsoft Corp. executive, is also taking on responsibility of Hewlett-Packard’s cloud-computing services, an area where it’s struggled to gain market share.

Whitman has also shaken up Hewlett-Packard’s board. The company added three directors in July, including former Microsoft software head Ray Ozzie, Jim Skinner, the former CEO of McDonald’s Corp. and current chairman of Walgreen Co., and Dob Bennett, the ex-CEO of Liberty Media Corp. The changes come after former chairman Ray Lane resigned his position in April, and Hewlett-Packard is searching for a new chairman.

“I view this as a marking-time quarter in the process of them re-allocating their assets and shoring up the various divisions,” said Chris Bertelsen chief investment officer at Global Financial Private Capital, in Sarasota, Florida, which bought Hewlett-Packard stock last year and pared its position this year after a run-up in price. “It’s a restructuring and execution story.”

Before it's here, it's on the Bloomberg Terminal.