Hewlett-Packard Co. (HPQ) Chief Executive Officer Meg Whitman, in her drive to boost profitability, took another step toward dismantling the computing empire former CEO Mark Hurd built with $24.3 billion in acquisitions.
The company is writing down the value of its enterprise- services business by $8 billion and shuffling management at the top of the division, Hewlett-Packard said yesterday. That follows an announcement in May that Whitman is eliminating 27,000 jobs, many of them from that unit.
The writedown reflects the dwindling value of Electronic Data Systems Corp., bought by Hurd for $13.2 billion in 2008. The deal pushed Hewlett-Packard into the low-margin business of information-technology outsourcing, handled more efficiently by rivals such as Wipro Ltd. (WPRO) and Tata Consultancy Services Ltd. (TCS) It left the company Whitman inherited ill-equipped for the shift toward cloud computing, making it a laggard in services that help clients deliver software over the Internet.
“She’s taking the company toward higher margin, more strategic categories,” said Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco. “If she does what she says she’s going to do, services is going to be a smaller, more profitable business. She’s talking about cloud, analytics and security -- and not competing with the Wipros and Tatas of the world.”
Whitman, CEO since September, is revamping the services business after saying in December that Hewlett-Packard will turn WebOS into an open-source project. That resolved a debate over how to salvage assets from another Hurd acquisition -- the $1.2 billion purchase of Palm Inc. in 2010.
Among the moves announced yesterday, Palo Alto, California- based Hewlett-Packard said it’s replacing John Visentin, the executive who’d been heading enterprise services, a year after former CEO Leo Apotheker promoted him to the job. Mike Nefkens, a services executive in Europe, is taking his place on an acting basis, and Jean-Jacques Charhon, chief financial officer for enterprise services, becomes the unit’s chief operating officer.
Sales in Hewlett-Packard’s services business barely budged last fiscal year, rising 1.2 percent to $36 billion. The division grew less than 1 percent in fiscal 2010.
Within the services division, about 30 percent of sales come from repairing and maintaining machines sold by Hewlett- Packard, which according to Abhey Lamba, an analyst at Mizuho Securities USA Inc. in New York, is a profitable business. More than 40 percent of revenue is from lower-margin technology outsourcing, the business bolstered by the EDS deal.
“The EDS acquisition was not a success for the company, because ever since it occurred we have not seen strong growth in their services business, and margins have come down,” said Shebly Seyrafi, an analyst at FBN Securities in New York.
Hewlett-Packard rose 2.4 percent to $19.41 at the close yesterday in New York, and has declined 25 percent this year.
Whitman’s bid to turn around the services business hinges on Hewlett-Packard’s ability to build teams that can help companies use modern programming techniques and deliver their applications via cloud computing to become more efficient. At the same time, Hewlett-Packard needs to lessen reliance on the more conventional work of running customers’ IT operations.
Hewlett-Packard yesterday also raised its third-quarter earnings forecast. Profit excluding some items will be $1 a share, up from a prior projection of 94 cents to 97 cents. The net loss will be $4.31 to $4.49 a share, Hewlett-Packard said. That indicates a loss of $8.56 billion to $8.92 billion, the biggest since at least 1989, data compiled by Bloomberg show.
In the third quarter, Hewlett-Packard said it expects a writedown of approximately $8 billion stemming from “business trends within the services segment.”
The company also anticipates a pretax charge of $1.5 billion to $1.7 billion related to job cuts, up from a prior projection of $1 billion.
Hewlett-Packard may report a profit margin of 23.1 percent in the current fiscal year, down from the 23.4 percent margin the company reported for its 2011 fiscal year, according to the average of analysts’ estimates compiled by Bloomberg.
“They’re making changes, but it’s going to be several years before they get it right,” Seyrafi said. “The charges are a recognition that the prior management strategy did not succeed.”
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