HP Takes Bold Action to Change Course

Hewlett-Packard (NYSE: HPQ) beat its earnings per share projections and announced a bold restructuring plan that cuts 27,000 employees. The maker of computers, printers, and data storage wants to be more nimble to innovate and compete. For the moment, investors seem pleased and lifted the company's shares from $20.57, a new 52-week low on May 23, to reinvigorate it today.

Though the company's revenue and net earnings were down for its fiscal second quarter ended April 30, a new strategy is underway at Hewlett-Packard. Its second-quarter earnings per share of $0.80 topped the previously expected range of $0.68 to $0.71 per share. That is still down significantly from $1.05 in earnings per share for second quarter 2011.

The company reported $1.6 billion in net earnings for the period on revenue of $30.7 billion, compared with net earnings of $2.3 billion on $31.6 billion in revenue for second quarter 2011.

Michael Holt, an analyst with Morningstar, said HP's second-quarter results suggest the company is regaining stability. "They are setting targets and meeting those targets," he said. "All through 2011, it was chaotic. You never knew what they were going to do." According to Holt, HP's estimates and guidance last year changed from quarter to quarter. "Some people felt like they were spinning out of control."

Hewlett-Packard still has some rough spots to work on. Revenue for its imaging and printing division was down 10% year-over-year. Holt listed HP's printing division among the biggest risks for the company apart from industry and economic issues. "HP has been struggling the last couple quarters from growth and margin compression perspectives," he said, noting that the company attributed its struggles to excess inventory in the supply channel.

HP is now showing signs of a new vision for the printing division, Holt said, with a caveat: "Printing is a place where we still need to see more evidence that they have a plan and that the plan is going to work."

HP's enterprise server, storage, and networking segment also saw its revenue decline, down 6% compared with the prior year period. However revenue from its software business, which includes software analytics subsidiary Autonomy, grew 22% year-over-year.

Gains on the software front were not enough to keep Mike Lynch, founder of Autonomy, safe. The "significant decline" in Autonomy's licensing revenue during HP's second quarter seems to have prompted Lynch's departure as CEO of the subsidiary. He sold his company to HP last October for between $11 billion and $12 billion.

Lynch is not alone as he exits. HP said it would drop 27,000 employees from its ranks by the end of fiscal 2014. This 8% reduction in staff, along with other restructuring plans, is expected to bring the company between $3 billion and $3.5 billion in annualized savings by the end of fiscal 2014.

Hewlett-Packard said it would reinvest that money to strengthen its research and development, software for big data, enterprise servers, and other divisions. Those efforts must build on the company's emerging stability if HP wants to stay clear of last year's chaos. "This is not a story about how they need to be the next Google or Oracle," Holt says. "They have good assets in place and need to stop shooting themselves in the foot."