HP's latest do-over: Skepticism abounds

Analysts reserve praise for HP's restructuring. Why? HP has repeatedly restructured to no avail.
Written by Larry Dignan, Contributor

HP's move to cut 27,000 jobs, reinvest in research and development and generally get the company on better footing sounds promising on paper. Unfortunately for HP CEO Meg Whitman too many people have heard this song and dance before.

In other words, there's a lot of skepticism about whether HP can get its innovation mojo back. To recap, HP posted better than expected earnings and announced a restructuring. To its credit, most of the restructuring savings will go to R&D. Former CEO Mark Hurd cut 50,000 jobs in five years and cut R&D.

Related: HP cuts 27,000 jobs, to plow savings into R&D | HP beats the odds on Q2 earnings despite looming layoffs | CNET: Hewlett-Packard just whacked the wrong executive

Whitman said on HP's earnings conference call:

I would say that our performance began to stabilize. We saw some bright spots. There's still an awful lot of work to be done and we're looking at every option to accelerate the pace. As discussed during our Q1 call, we are working very hard to better align HP's cost structure with its revenue profile. We’re streamlining and removing complexity at every turn, and in the process, we're creating the capacity to invest in innovation and quality. And over time, we're of course thinking about how we can drop some of our savings to the bottom line.

HP shares are up a bit the day after the company's results, but few analysts are calling the turnaround. In fact, HP's restructuring is being portrayed in some camps as a move that won't alter the reality the company could be facing businesses stuck in a secular decline.

Here's a sampling of the post-game analysis after what appears to be a positive first step for HP.

Barclays analyst Ben Reitzes:

HP’s revenue, earnings, annual guidance and overall commentary were all better than expected heading into this report, especially given Dell’s comments just a day ago. While we believe any turnaround will be a multi-quarter effort for HP, investors are likely to see this report as a positive first step. That said, in the context of demand deterioration in Europe and secular pressures still in many businesses into 2H12, we still believe it may be too early to make the call for a sustainable turn.

Big concern: HP's software business reported revenue of $970 million, well below his estimates. Turns out Autonomy's business fell off dramatically. Autonomy chief Mike Lynch will leave to be replaced by Bill Vegte. HP spent $11 billion for Autonomy and "its rapid shortfall is troubling," said Reitzes.

Deutsche Bank analyst Chris Whitmore said:

We note that past restructurings (~50K headcount reduction over 5 years under Hurd) have done little to improve HP’s competitive position or reduce its reliance on declining or troubled businesses (printing, PC, Itanium, etc), nor improve its market share trajectory in storage or servers. We therefore adopt a ‘wait and see’ approach to this latest round of restructuring and its impact in overturning deteriorating company fundamentals. Barring a significant change in strategic direction, we anticipate protracted declines in HP’s three major businesses (services, printers, PCs).

Big concern: "Looking forward, services will likely remain under pressure for several quarters due to reduced headcount and poor competitive positioning (competitive bidding, attracting and recruiting higher margin service capabilities, re-investment, etc)," said Whitmore. Evercore analyst Rob Cihra said:

HP has already taken more than $5 billion in restructuring charges over the past 7 years, and yet we think its competitive position has only eroded. In fact, from an innovation and value-add standpoint, we tend to think HP already cut “too” far, and yet is now going back to the well. When including amortization, the gap between HP’s GAAP and non-GAAP earnings just keeps getting wider, having already jumped to $3.3B in FY11 vs. $2.1B in FY10, all while cash flow keeps declining.

Big concern: Erosion will hit all of HP's key businesses. "We see erosion across practically all of HP's consumer and commercial PC, printing, enterprise, and services businesses.

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