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HP’s earnings plummet as Whitman tries to right ship

HP earnings plummet as a new CEO takes the helm

Hewlett-Packard Co. (NYSE: HPQ) continues to struggle with leadership and business changes, reporting on Monday that fourth-quarter net earnings dropped 91 per cent over last year.

The news comes just as Meg Whitman, former eBay chief, takes the helm at HP, reversing some decisions made by her predecessor, Leo Apotheker. She recently announced plans to keep HP’s struggling PC business, after Apotheker had made plans to sell it or spin it off.

Net earnings for HP in its fourth quarter were US$200 million, down from US$2.5 billion in the same period last year. Diluted earnings per share were US$0.12, down 89 per cent from US$1.10 in 2010.

Net revenue dropped three per cent in the fourth quarter to US$32.1 billion, from US$33.3 billion in the fourth quarter a year ago.

HP’s software group performed the best during the quarter, boosted by growth in licenses and services, with revenue up 28 per cent compared to 2010. Financial services revenue also did well, growing 18 per cent.

Services revenue at HP grew two per cent, hitting US$9.3 billion for the quarter. But the company’s enterprise servers, storage and networking group posted a four per cent revenue decline over last year, and imaging and printing was down 10 per cent year over year.

HP’s personal systems group, which includes computers, declined two per cent, to US$10.1 billion. A month ago, HP did an about-face, announcing it would keep its PC business.

Executives on a conference call to discuss the results talked about a number of “headwinds” that slowed down growth for 2011 and are likely to continue to put pressure on the company in the future. The poor macroeconomic situation globally led to weak consumer spending all year and poor commercial spending in the final two quarters, Whitman said.

HP was also hurt by internal issues.

The leadership changes and announcements about major business changes had an impact. “There was a lot of drama in 2011,” Whitman said. “We need to get back to putting our heads down and reduce the drama here.”

Those business changes, including around the PC business, created a lot of uncertainty and confusion, she said. “I had partners tell us they thought we were getting out of hardware entirely,” Whitman said. “We’re in the software business to deliver value for customers, not to transform HP into a software company.”

Going forward, HP results will reflect some other challenges. One is a shortage of hard disks as a result of the flooding in Thailand. “It’s a terrible situation, and I’d say it remains dynamic,” Whitman said. She has spoken to four of HP’s major suppliers in the region, and “they don’t have a complete picture of when they’ll be back up and running,” she said.

“It will affect the industry pretty dramatically, and I think there will be some shortages in Q1 and Q2. I think this will be pretty tough for the industry,” she said.

However, HP reacted very quickly to news of the flooding and made strategic buys, meaning it has gotten “more than its fair share” of the drives, she said.

In fact, it is so well-positioned that “the Googles and Facebooks” of the world that typically build their own servers have been calling HP because they can’t get disk drives anymore, she said.

These pressures will lead to continued declines in revenue and profit in 2012, while the company lays the groundwork for growth to start up in 2013.

HP’s plans for growth revolve around increasing its research and development activities, at the expense of acquisitions. This year the company increased its R&D investment by 10 per cent, and it plans to similarly increase spending in the area in 2012.

While HP will consider small acquisitions, in the US$500 million range, it’s unlikely to make larger investments unless they fill a strategic hole, Whitman said.

“I will tell you we cannot continue to rely on acquisitions alone at HP. We have tremendous R&D capability here. We cut out a lot of muscle in R&D in this company, and we have to invest more in it,” she said.

But she cautioned investors not to expect a quick turnaround. “You’ll see improvements every year, but we’re making some long-term bets, because you just can’t continue to run this company for the short term,” she said.

Investors are likely keen to see some stability at HP after the revolving door at the top of the company. Whitman, who is perhaps best known for her time as CEO at eBay, took over for Apotheker in September after he served for under a year. Apotheker replaced Mark Hurd, who was ousted after allegations of sexual harassment.

HP, under Apotheker, decided to quit selling phones and tablets based on webOS, the software it bought along with Palm. When HP dropped the price of the TouchPad tablet to clear inventory, a buying frenzy followed. Recent rumors suggest HP is close to coming to a decision about what to do with the webOS software.

There was very little mention of webOS on the conference call, except to mention that in the fourth quarter, HP spent nearly US$1.7 billion in costs and goodwill charges related to winding down the business.

For the full year, HP reported net earnings of US$7.1 billion, down from US$8.8 billion last year. Net revenue for its fiscal 2011 was US$127.2 billion, down from US$126 billion last year.

For the first quarter of fiscal 2012, HP is hoping for diluted EPS in the range of US$0.61 to US$0.64.