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August 23, 2012

Services writedown sends HP to $8.8bn loss

Even without that EDS writedown, the figures still don't look great for HP

By Steve Evans

HP has recorded a quarterly loss of $8.8bn, the biggest in its history, after slowing PC sales were compounded by a huge writedown of its $14bn EDS acquisition in 2008.

The cost of the huge restructuring process HP is currently going through also contributed to the loss. The company is in the process of laying off 27,000 workers – around 10% of its total employees.

Revenue came in at $29.7bn, a 5% drop compared to the $31.2bn recorded in the same quarter last year. This was also below the Wall Street estimate of £30.1bn. Shares dipped by 4% as a result of the news.

There is very little to be positive about from these results. The PC division, which forms around 30% of HP’s revenue, saw a 10% year on year fall in sales. Commercial revenue decreased 9%, and consumer revenue declined 12%, the company said. Total unit sales were down 10%.

This reflects a generally slowdown in PC spending. A combination of the imminent launch of Windows 8 and the surge in tablet sales mean consumers and businesses are not buying PCs in significant numbers at the moment. Recent figures from Gartner looking at PC sales in Western Europe for the second quarter of 2012 saw a 2.4% decline. That quarter saw HP’s shipments fall 13%, according to Gartner.

The printer division, which is usually another safe bet for HP, also suffered. Its Image and Printing Group saw a 3% fall in revenue. Although commercial hardware revenue was up 4% that was offset by a 13% drop in consumer hardware and a 23% fall in consumers shipments.

HP’s attempted regeneration, from a maker of hardware to a software and systems maker in the shape of IBM, is well documented but these results suggest that strategy is failing.

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The acquisition of EDS back in 2008 was meant to be HP’s arrival as a big services player, but the huge writedown implies all is not well in that department and shows that HP overpaid on the acquisition. CEO Meg Whitman announced a change in leadership in that department just a few months ago, believing change was not happening fast enough.

Revenue from services fell 3% year over year, however the bigger fall in sales from the PC division means the services arm is now HP’s biggest revenue generator. Enterprise Servers, Storage and Networking revenue fell 4% year over year.

One bright spot is the software division, which saw an 18% rise in revenue, which includes the results from Autonomy.

Speaking to journalists after the announcement, Whitman said Autonomy "still requires a lot of attention" but the changes implemented three months ago, including the departure of Autonomy founder Mike Lynch, should benefit the company. HP has also implemented changes in the sales process at Autonomy, which was one of the big criticisms made during the last financial results.

"HP is still in the early stages of a multi-year turnaround, and we’re making decent progress despite the headwinds," said Whitman in a statement. "During the quarter we took important steps to focus on strategic priorities, manage costs, drive needed organisational change, and improve the balance sheet. We continue to deliver on what we say we will do."

Dell, another company struggling to reinvent itself as a software and services firm, also released its financial results this week. Revenue fell 8% with net income dropping by 18%.

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