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Hewlett-Packard “making progress” on turnaround despite challenges

Smita Nair

Business overview: Hewlett Packard's turnaround story (Part 2 of 6)

(Continued from Part 1)

HP CEO Meg Whitman said the company is “making progress” on the turnaround and expects revenue to stabilize this year, and accelerate in 2015. While HP faces a challenging macro environment, shifting market forces and a rapidly changing competitive landscape, Whitman believes the company has the right leadership team in place to advance its strategy, drive innovation across the business and improve its go-to-market execution. “We’re producing tangible results, strengthening our balance sheet and delivering innovative products across all our key segments. We are implementing the changes needed to support our multi-year turnaround journey, reaffirm HP’s leadership position, and create enduring value for customers as well as for our shareholders,” Whitman said in a  turnaround progress update last year.

Whitman announced a turnaround strategy for HP in October 2012, following plans in May 2012 of a multi-year restructuring to fuel innovation and enable investment around its three areas of strategic focus: cloud, big data and security. By that time, the company saw more than a $90 billion decline in market value since the end of 2009. The company had lost credibility with the market and investors alike due to declining earnings, leadership changes and poorly executed decisions. Whitman, who became CEO in September 2011, was HP’s third chief executive in just over two years. Former CEO Leo Apotheker took the market by surprise in August 2011 by announcing the company is planning to sell or spin off the PC business, its largest business segment back then, and focus on cloud computing and software services. The company discontinued support for devices with webOS, whose rights were acquired by HP when it bought Palm Inc in 2010. HP also killed its tablet TouchPad just seven weeks after it was launched on the market after the product saw poor sales. The tablet was unable to compete against Apple (AAPL)’s iPad and tablets from Samsung (SSNLF) and others with Google (GOOG)’s Android OS. HP’s PC segment was facing declining sales and competition from China’s Lenovo. The announcements coupled with a string of disappointing earnings sent the stock down more than 40% and led to the ouster of Apotheker in September 2011.

Apotheker also orchestrated HP’s ill-fated $11.1 billion acquisition of British software company Autonomy, which was into intelligent search and data analysis. HP took an $8.8 billion write-down on Autonomy towards the end of 2012, attributing $5 billion of it to accounting fraud. HP shares plunged from $50 in early 2011 to around $12 in November 2012 after the company said it posted a substantial quarterly loss due to the writedown. The technology giant said it discovered “serious accounting improprieties” at Autonomy, including “outright misrepresentations” that took place before HP bought the company. HP recently restated Autonomy’s 2010 financial performance, and the unit’s income was reduced by 54% and its operating profit by 81%. Autonomy’s founder and former chief Mike Lynch has denied HP’s allegations. The Autonomy acquisition had seen widespread criticism from analysts owing to the high price. HP recently agreed to pay $57 million to settle fraud-related lawsuits filed by shareholders over the controversy and write-down. The lawsuits have claimed that the management ignored the warning signs before the acquisition, were aware that Autonomy had been overvalued, and misled investors.

HP’s expensive acquisition track record started with former CEO Carly Fiorina‘s decision to acquire Compaq for $25 billion in 2005, followed by Mercury Interactive in 2006  for $4.5 billion, EDS for $13.9 billion in 2008, 3Par for $2.35 billion and Palm for $1.2 billion in 2010. However, these acquisitions did not enhance the company’s value. On the other hand, its long term debt stood at $21.8 billion as of October 31, 2012.

Under the restructuring, HP announced plans to lay off 27,000 employees, or 8.0% of its workforce as of October 31, 2011, by the end of fiscal year 2014. This number was increased to 34,000 in December 2013 due to “continued market and business pressures.” The restructuring was expected to generate annualized savings in the range of $3.0 to $3.5 billion exiting fiscal year 2014. Whitman reiterated last year that she expects HP’s revenues to grow in line with gross domestic product (GDP) over the long term.

In October last year, Whitman noted the multi-year turnaround remains broadly on track. The company’s cash flow from operations in the “fix and rebuild year”2013 was $11.6 billion due to cautious inventory management and cost cuts. Operating company net debt was reduced by almost $8 billion last year, approaching a goal of zero. Whitman recommitted to smarter innovation, with research and development (R&D) spending expected to be in excess of $3 billion in fiscal 2013. For fiscal 2014, HP estimates non-GAAP diluted net EPS to be in the range of $3.60 to $3.75 and GAAP diluted net EPS to be in the range of$2.85 to $3.00. With pockets of growth helping to offset continuing challenges in the macro environment and weak public sector spending, HP expects the year-over-year revenue decline in fiscal 2014 will moderate from fiscal 2013.

Continue to Part 3

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