HP gives bleak forecast as corporate split nears

HP's split into two companies seems to be on track, but the strengthening dollar has forced it to lower its outlook for the year

Hewlett-Packard has lowered its financial outlook for the year after another quarter of declining sales and profit.

CEO Meg Whitman is trying to get HP in shape before the company splits itself in two later this year. One half will sell PCs and printers and the other will focus on back-end business products.

But the strengthening dollar is making life tough for U.S. multinationals and HP is no exception. A strong dollar can have several negative effects, including making overseas sales seem smaller when they're translated back into the home currency.

"As is the case with many U.S.-based companies, this currency challenge is having a significant impact on HP's financial outlook," the company said in a statement Tuesday.

HP is particularly vulnerable because two-thirds of its revenue is from outside the U.S., Whitman said on a conference call.

It's a complex issue with a lot of moving parts. While the dollar is strong, the Japanese yen is currently weak, and that hurt HP's profitable printer business, Whitman said. That's because the weak yen allowed rivals in Japan to cut printer prices overseas and still pull in decent revenue when the sales were converted back to their own currency.

HP now expects adjusted earnings for fiscal 2015 of $3.53 to $3.73 a share, well below the $3.95 analysts have been expecting, according to Thomson Reuters. HP also lowered its forecast for the current quarter.

The news sent its shares 7 percent lower in after-hours trading, to $35.79 at the time of this report.

"While we were able to manage the impact of currency in the quarter and deliver earnings as expected, we believe the impact on [fiscal year 2015] will be significantly greater than we anticipated in November," Whitman said in the statement.

HP will try to offset the currency issue by adjusting prices, but mitigating it fully would mean cutting investments and "mortgaging our future," Whitman said.

"We won't do that," she said.

Even without the strong dollar, HP's business declined in the quarter ended Jan. 31. Revenue was $26.8 billion, down 5 percent from a year earlier, or down 2 percent adjusting for the currency fluctuation.

Net profit was down 4 percent to $1.4 billion, HP said. Excluding unusual items, earnings were $0.92 a share, up 2 percent from last year and slightly better than expected.

None of HP's main divisions reported any growth. Sales from its personal systems group were flat, while printing and enterprise services both reported a drop in sales.

Revenue from its enterprise products division was flat. Within that group, x86 server sales were up 7 percent, but networking sales fell 11 percent and storage sales stayed the same.

The results would have been better without the currency effects, but that's the world HP has to live in.

HP announced last year that it will split itself in two by the end of this fiscal year, which closes Oct. 31. The split seems to be on track, but HP will incur heavy costs in areas like consulting, IT and legal expenses.

Those costs are expected to be $1.3 billion this fiscal year and a $500 million next year, CFO Cathie Lesjak said. They're "large numbers." she admitted, but equal to less than 2 percent of HP's annual operating costs.

HP is doing whatever it can to reduce spending. It already said it will cut its workforce by 55,000 by the end of the year, and executives hinted Tuesday that more job cuts will come when the company breaks in two.

HP may even start shipping some products by boat instead of by plane, Lesjak said, which could increase inventory but reduce its costs further.

HP looks to be on the ropes, and the next few quarters are going to be crucial to its future.

Copyright © 2015 IDG Communications, Inc.

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