HP Raises Earnings, Restructures Struggling Enterprise Services Division

Published
  • August 08 2012, 3:10pm EDT

August 8, 2012 (Bloomberg) – HP raised its third-quarter earnings forecast after cutting jobs to reduce costs and announced a restructuring of its ailing enterprise-services division that includes an $8 billion writedown.

CEO Meg Whitman is eliminating positions across the company to counter slower demand for printers, services and data-center equipment. The writedown underscores the diminished value of the unit that provides computing services to companies – a business former CEO Mark Hurd (and current Oracle executive) bolstered in 2008 with the $13.2 billion purchase of Electronic Data Systems Corp.

“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, in an interview.

HP promoted Mike Nefkens to lead its enterprise services unit on an acting basis, replacing John Visentin, who is leaving to pursue other interests. Jean-Jacques Charhon, senior vice president and chief financial officer for enterprise services, was named chief operating officer for the unit, reporting to Nefkens.

‘Rejuvenate Services’

“The executive changes reflect HP’s efforts to streamline the organization and rejuvenate the services business,” said Brian Marshall, an analyst at ISI Group, in a report today.

Nefkens will be responsible for HP’s applications, business processing and outsourcing services, reporting to Whitman. Prior to joining Electronic Data Systems, he held several executive positions at Holland Chemical International NV.

Charhon joined HP in 2010 as vice president of finance for the personal systems group, and previously worked in a series of leadership roles at General Electric Co.

In the third quarter, HP said it expects a writedown of approximately $8 billion stemming from “business trends within the services segment.”

Workforce Reduction

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. A workforce reduction of 27,000 was announced in May.

HP 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.”

Markets React

Profit excluding some items in the third quarter will be $1 a share, up from a prior projection of 94 cents to 97 cents, the Palo Alto, California-based company said today in a statement. Analysts on average had estimated profit excluding some costs of 97 cents, according to data compiled by Bloomberg. The shares rose 2.6 percent to $19.46 at 11:38 a.m. in New York, and had declined 26 percent this year through yesterday.

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