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Restructuring Affects HP's Guidance

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Hewlett-Packard Companys (HPQ - Free Report) current CEO Meg Whitman is keen on improving the company’s profitability by way of initiating a number of restructuring programs.

The company is shuffling its top management in an effort to restructure its low-margin Enterprise Services segment. Hewlett-Packard declared that Mike Nefkens, services executive in Europe, is replacing the enterprise services head John Visentin on an acting basis. Enterprise services’ Chief Financial Officer Jean-Jacques Charhon is being appointed as the unit’s chief operating officer.

H-P also decided to write down the enterprise-services business by $8.0 billion. The write-down is in relation with the acquisition of Electronic Data Systems Corp., which was acquired by H-P for $13.2 billion in 2008, when Mark Hurd was at the helm.

Following the acquisition, Hewlett-Packard was compelled to enter into low-margin information-technology outsourcing business, which is actually the forte of Wipro Ltd. (WIT - Free Report) and Tata Consultancy Services Ltd. (TCS - Free Report) . However, Hewlett-Packard realized after the takeover that Electronic Data Systems did not have enough technical depth for a smooth transmission into cloud computing. Eventually, the company failed to deliver efficient services that help clients provide software over the Internet.

Moreover, the company upped its projection for pretax charge from $1.0 billion to a range of $1.5 billion - $1.7 billion related to a job cut announced in May. The CEO announced to lay off 27,000 employees by the end of fiscal 2014, which includes most of the employees from the Enterprise Services unit.

The company expects the accounting adjustments to generate a loss of $4.31 to $4.49 per share that comes to around $8.5 billion to $8.9 billion, which will be the biggest quarterly loss HP has suffered in its 73-year history. Over the last 15 years, this would be the second time that HP will incur loss in a quarter.

Hewlett-Packard is a leader in today’s technology-driven world, and apart from cloud computing, the company has earmarked the enterprise storage space as one of the most enviable growth areas. We believe that H-P is doing very well in this category.

H-P looks to make its cloud computing services public within two months. H-P's cloud services will be somewhat similar to the cloud platform offered by Inc.’s (AMZN - Free Report) Web Services.

H-P’s cloud infrastructure is also popular among its customers. But its software- as-a-service offering may take some time to ramp up, as it will be first used by the existing customers. On the other hand, the economic turmoil, lackluster PC demand and Meg Whitman’s yet-to-be-proven strategies keep us on the sidelines.

Currently, H-P has a Zacks #3, implying a short-term Hold recommendation.

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