Oct 7, 2013

Whitman’s Turnaround Plans at HP Under Scrutiny This Week

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Later this week, Hewlett-Packard CEO Meg Whitman will give Wall Street analysts and the rest of the world the latest view on the state of her efforts to turn the massive computing and services giant around. The company will be hosting a meeting with analysts in San Francisco on Wednesday.
Judging by HP’s share performance this year, it is likely to be a happier gathering than last year, when the company drastically cut its outlook for 2013. But then it would be hard to surpass last year’s analyst meeting on the “bad news” scale.
Since that time, HP shares had been one of the Dow’s leading performers — that is until HP was cut from the Dow Jones Industrial Average last month. As of this morning, HP shares had risen by 48 percent since the end of 2012.
But HP has been seen to be swimming upstream on many fronts. When the company last reported its quarterly earnings in August, Whitman admitted that a key plank of her strategic plan for pushing HP toward recovery appeared unlikely. Whereas 2012 and 2013 were to be the years of stabilizing and repairing HP, 2014 was to be the first year of meaningful growth. On a conference call with analysts on Aug. 21, she said that now appears “unlikely.”
There are many reasons for this, many of which are not Whitman’s fault. One big one is the decline of the personal computer industry. On one hand there’s the fact that PC sales have contracted at a rate never seen before in the history of the industry. Second, amid that decline China’s Lenovo has overtaken HP as the world’s leading vendor. With HP’s personal systems group still amounting to the biggest chunk of its overall business by revenue — $7.7 billion or nearly 28 percent of sales at in the most recent quarter — it’s hard to see a path to easy growth. In the latest quarter sales in the segment fell by 11 percent, and profits fell by nearly 44 percent.
Things look no easier in the Enterprise group, the sprawling $30 billion business unit (2012 sales) which was to represent its future hopes for a recovery which as of last quarter accounted for more than 24 percent of total revenue. In the most recent quarter sales fell by more than nine percent and profits by 20 percent.
Whitman conceded that she was so disappointed by the results in that business unit that she reassigned its head, Dave Donatelli in a significant executive shakeup. Before that she reassigned Todd Bradley, the former head of the PC and printing unit before that.
Add to the declines an newly aggressive set of competitors, not the least of which is a soon-to-private Dell, a printing business that has sort of flattened out and an Enterprise Services business that is still in the process of being repaired, and it’s difficult to see how Whitman and CFO Cathie Lesjak, who will likely provide the company’s latest financial outlook, will be able to spin a positive outlook for 2014 or beyond.
Analysts are already forecasting declines both in revenue and profits. The average estimate of the 31 analysts surveyed by Thomson Financial calls for HP to report sales of $107.7 billion in 2014, which would amount to a decline of nearly 11 percent from 2012. Put another way, if those forecasts turn out to be accurate, the biggest technology company in the world will have seen its sales decline by more than $12 billion in two years.
If HP’s formal guidance is significantly worse than what the street already expects, it will amount to the first meaningful indications that Whitman may not be on track to do what she set out to do when she took over as CEO in 2011. Her stated plan to reinvigorate HP and put it on a path to sustained growth could morph into one marked by instead by managing its long-term decline as best she can.
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