H-P's Earnings Top Views Despite Revenue Drop--4th Update

By Robert McMillan 

Hewlett-Packard Co.'s upcoming breakup into two separate companies will cost billions--but there will be $1 billion in cost savings too, the company said Thursday.

The storied Silicon Valley institution will formally divide into two public companies by Nov. 1: HP Inc. will be the PC and printer company and Hewlett-Packard Enterprise will sell the company's business software, servers and networking gear. H-P has said it would spend $1.8 billion in restructuring and a further $950 million in taxes to accomplish the split.

In reporting earnings for the second quarter ended April 30, it warned of another $400 to $450 million in "dis-synergy"--the cost of duplicating functions formerly handled by a single department.

"Those come about as a result of having to replicate corporate functions: Things like having to have two CFOs, two treasurers, and two general-counsels," said Cathie Lesjak, H-P's Chief Financial Officer.

H-P said it would incur a one-time charge of $1 billion in connection with the separation. It also announced a further $2 billion in restructuring costs in its Enterprise Services group. Toni Sacconaghi, an analyst with Bernstein Research, said the latter expense most likely would result from reducing head count. "That's a very significant incremental set of workforce reductions. That will be tens of thousands of people."

But H-P would cut costs too, Ms. Lesjak said. "As a result of the separation, we think that there will be opportunities to find some cost savings."

Meanwhile, the company is struggling to boost revenue in a sluggish PC market. It reported Thursday a 7% drop in revenue for the quarter, hurt by a strong U.S. dollar and declines in all the company's major segments. It was the 14th decline, year-over-year, in the past 15 quarters. Moreover, it issued downbeat earnings guidance for the current quarter.

H-P's PC group was hit harder than expected, with revenue down 5 percent. The Software group was no healthier, down 8 percent year-over-year, as was Enterprise Services, down 16 percent.

But CEO Meg Whitman was able to point out some bright spots. Sales of Intel-based servers--a troubled business a couple of years ago--were up 11 percent year-over-year. "The PC market was tough, but we gained share in every region, in just about every product category," she added.

The company's non-GAAP earnings per share of $0.87 on $1.01 billion in profit beat expectations and the company maintained its outlook for the year. Shares of H-P, which were off 16% for the year as of Thursday's market close, rose 1.7% to $34.40 in after-hours trading.

H-P is dividing up the company's staff of 300,000, real estate at 600 locations and a Gordian knot of 2,700 information technology systems in 170 countries. It has assembled a team of several hundred employees to manage the massive task.

The company will lay out the financial details of the two new H-Ps, both of which are due to rank as Fortune 50 companies, in SEC documents expected to be filed in July.

The company spooked investor confidence in the split with its first-quarter financial report, which cut earnings guidance and disclosed the $1.8 billion in restructuring costs.

But it looks as though the H-P split makes sense, Mr. Sacconaghi said. The resulting companies will likely "offer distinct value propositions," he said, with HP Inc. driving dividends to investors and Hewlett Packard Enterprise being an earnings-per-share growth pick.

Also on Thursday, H-P announced that China's Tsinghua Holdings Subsidiary would spend $2.3 billion acquiring a 51 percent stake in a newly created business comprising H-P's H3C Technologies Co., a seller of networking hardware, and H-P's server, storage and support business in China.

The company's quarterly revenue of $25.5 billion fell below the $25.635 billion projected by Wall Street analysts. The company had warned that the strong dollar would hurt results. The decline was 2% on a constant-currency basis, H-P said.

H-P said it expected per-share earnings excluding items of 83 cents to 87 cents for the current quarter. Analysts polled by Thomson Reuters had projected 87 cents.

Josh Beckerman contributed to this article.

Write to Robert McMillan at [e-mail]

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