HP’s turnaround strategy is on track, according to president and CEO Meg Whitman, giving delegates to HP’s 2013 Securities Analyst Meeting an update on the company’s progress executing against its turnaround plan and future strategy.
Whitman reviewed the accomplishments of the past year – a “fix and rebuild” year – noting that the multi-year turnaround remains broadly on track. In particular, the company:
* Has met or exceeded quarterly non-GAAP diluted earnings per share (EPS) outlook since the turnaround plan began through Q3 of fiscal 2013.
* Provided outlook in August that HP expects free cash flow to approach $8-billion by the end of FY13.
* Reduced operating company net debt by almost $8-billion over the past 12 months, approaching a goal of zero.
* Recommitted to smarter innovation, with research and development (R&D) spending expected to be in excess of $3-billion in fiscal 2013.
“While there is a lot more work to be done, I am confident about the progress we are making,” says Whitman.
“We’re producing tangible results, strengthening our balance sheet and delivering innovative products across all our key segments. We are implementing the changes needed to support our multi-year turnaround journey, reaffirm HP’s leadership position, and create enduring value for customers as well as for our shareholders”
The core of HP’s strategy is focused on providing technology solutions for the “New Style of IT”, she says. HP has the combination of hardware, software, scale and innovation to provide the integrated solutions that help customers realise the full benefits of cloud, security, big data and mobility.
While the company faces a challenging macro environment, shifting market forces and a rapidly changing competitive landscape, Whitman emphasises that the company has the right leadership team in place to advance its strategy, drive innovation across the business and improve its go-to-market execution. Whitman reiterated that she expects HP’s revenues to grow in line with gross domestic product (GDP) over the long term.
Cathie Lesjak, HP’s executive VP and chief financial officer, provided a financial outlook for fiscal 2014. With pockets of growth helping to offset continuing challenges in the macro environment and weak public sector spending, HP expects the year-over-year revenue decline in fiscal 2014 will moderate from fiscal 2013.
HP anticipates operating profit dollars to be flat to up year-over-year in fiscal 2014, due to its continued focus on cost savings and operational efficiency. The company estimates non-GAAP diluted EPS for fiscal 2014 to be in the range of $3,55 to $3,75. HP estimates GAAP diluted EPS to be in the range of $2,85 to $35 for fiscal 2014.
Fiscal 2014 non-GAAP diluted EPS estimates exclude after-tax costs related primarily to the amortisation of purchased intangible assets and a restructuring charge of approximately $0,8-billion.
HP expects to generate approximately $9-billion to $9,5-billion in cash flow from operations in fiscal 2014. After deducting estimated fiscal 2014 capital expenditures, the company anticipates free cash flow of $6-billion to $6,5-billion in fiscal 2014.
Lesjak articulated the company’s long-term commitment to financial discipline and a returns-based capital allocation strategy. In fiscal 2014, the company is expecting to return at least 50% of free cash flow to shareholders through dividends and share repurchases.
In addition, HP will invest in its product portfolio to accelerate high-growth areas in the New Style of IT. HP plans to reinvest approximately $0,12 per share of savings from its restructuring program into the business in fiscal 2014, including products and solutions such as 3Par, networking, Vertica and cloud solutions.
Dion Weisler, executive VP of the Printing and Personal Systems (PPS) business, and Steve Nigro, senior vice president of the Inkjet and Web Solutions Business, part of the Printing business, gave an update on PPS. Personal Systems continues to see traction in commercial, where it outgrew the market in the most recent calendar quarter over the same period last year. Printing continues to build on its long-standing market leadership across both ink and laser and introduced a number of new breakthrough products in both categories during fiscal 2013.
In fiscal 2014, PPS will focus on continuing to deliver on its leadership in traditional markets as well as driving product innovation and developing print solutions that address the New Style of IT. PPS’ priorities include profitable growth through greater segmentation, continued product innovation and using its leadership position in commercial to address opportunities in mobility, cloud and security.
Bill Veghte, executive VP and GM of HP’s Enterprise Group (EG), discussed the company’s opportunities in the $221-billion enterprise infrastructure market. As enterprise customers move to a New Style of IT, requiring more compute, more storage and more bandwidth, they will need solutions built on modern architectures and innovations designed for the future.
Veghte acknowledged executional challenges facing the HP EG business and provided a detailed plan to accelerate execution against great business opportunity—highlighting adjustments to leadership, operating model, route-to-market, and product and solution portfolio.
Veghte also gave a strategic overview of HP Converged Cloud and pointed to significant momentum in the past year as enterprises are rapidly adopting HP’s hybrid cloud strategy. More than 1,900 enterprise customers have turned to HP for their hybrid cloud solution in the past year, representing approximately 60% year-over-year customer growth.
Mike Nefkens, executive VP and GM of Enterprise Services (ES), and JJ Charhon, senior VP and chief operating officer of ES, provided an update on how ES has made progress on improving operations and better aligning costs with business objectives during the first three quarters in fiscal 2013.
Key priorities for fiscal 2014 include a focus on the build-up of advisory and transformation offerings, world-class service delivery, revitalisation of the sales engine, and ongoing cultural transformation across the organisation.
ES revenue is expected to decline 4% to 6% year-over-year in fiscal 2014. However, a sharp focus on operational improvements is expected to drive an improved operating margin of 3,5% to 4,5%. ES maintains its long-term financial model of 3% to 5% revenue growth, an operating margin rate of 7% to 9% and return on invested capital of 15% to 25%.
George Kadifa, executive vice president of Software, spoke about how Software is enabling the New Style of IT and accelerating HP’s ability to capture attractive market opportunities. The business is driving profit expansion, while disrupting markets with the breadth and depth of its technology offerings.
Looking forward, Software will focus on its differentiated strategy and strong product portfolio as well as continued operational improvements. HP estimates the total addressable enterprise software market is growing at a compound annual growth rate of 8% and by 2016, expects that market to be $69-billion.