HP Follows In Microsoft's Impairment Footsteps. Is it 2013 Yet?

Updated

You can't say iconic PC giant Hewlett-Packard (NYS: HPQ) didn't warn you, yet shares are still down as much as 8% today, after its earnings report.

Earlier this month, HP disclosed a number of organizational changes in its enterprise services division, along with the fact that it would be eating an $8 billion non-cash pre-tax goodwill impairment charge for its massive $13.9 billion acquisition of Electronic Data Systems back in 2008.

At the same time, the company actually raised its third quarter non-GAAP outlook -- you know, the one where you get to exclude things like ginormous one-time impairments -- to $1 in earnings per share, up from a prior range of $0.94 to $0.97. The GAAP outlook -- you know, the one that investors and the SEC really care about -- painted a different picture, though, with HP expecting a whopping $4.31 per share to $4.49 per share net loss.


Stop me if you've heard this one before
This charge is even larger than the one that HP partner Microsoft (NAS: MSFT) took just last month, writing down $6.2 billion in goodwill, primarily related to its 2007 acquisition of aQuantive, in its hopes to challengeGoogle in online advertising.

These respective acquisitions had very different purposes -- aQuantive for online advertising, and EDS for enterprise IT services -- but they certainly call into question each company's judgment with massive acquisitions to expand into other businesses. HP has already written off its $1.2 billion purchase of smartphone maker Palm and, luckily, it hasn't made any other questionable multi-billion-dollar deals recently, just waiting to get written down... Oh, wait. Never mind.

The breakdown
HP just officially reported earnings last night and, much like how Microsoft, which reported its biggest loss in its public history last month, HP did, too. One big difference, though, is that HP's public history spans much longer than Microsoft's. HP went public in November 1957, Microsoft in March 1986 -- nearly three decades later.

Third-quarter revenue shrank by 5% to $29.7 billion, with the personal systems group, which includes its core PC business, seeing the biggest drop. A year ago, the PSG was the biggest revenue generator, at 31% of sales, but it saw revenue shrink by 10%. The services segment has squeezed ahead by a hair as the biggest business now, albeit with more modest revenue declines, itself.

Of course, over the past year, HP's PC business has been under heavy scrutiny, and its perception arguably irreparably tarnished, as it was the earnings release exactly one year ago that then-CEO Leo Apotheker voiced his intentions to spin off the PC business, leading investors and customers alike to question HP's commitment to its biggest business. Dell (NAS: DELL) was happy to try and capitalize on HP's PC missteps, but even its revenue is down 8% from a year ago.

The only two segments that didn't decline were the tiny software and financial services businesses, which combined only account for 6.4% of revenue.

On a GAAP basis, HP realized a net loss of $8.9 billion, or $4.49 per share, right on target with the low-end of its guidance. That's a big red swing compared to the $1.9 billion, or $0.93 per share, profit seen a year ago. On a non-GAAP basis, adjusted earnings per share came in at $1.

There's plenty more where that came from
HP incurred a total of $10.8 billion in various charges, including the aforementioned goodwill impairment. There's still plenty of goodwill and purchased intangible assets on the books though, $44.8 billion worth at last count.

Investors can't help but wonder when the other shoe will drop with its Autonomy purchase. At the time, HP recorded $6.6 billion of goodwill, and $4.6 billion of amortizable intangibles from that deal. For the record, my guess is that, within the next three years, HP will similarly have to eat a goodwill charge for Autonomy, complete with investor indigestion.

We're under attack!
The bigger picture is that both HP and Dell's core PC businesses are under siege from all angles. Both companies are seeing their market share being chipped away by Asian players, like Lenovo, Acer, and Asus. Meanwhile, the broader PC market is being cannibalized by tablets, led primarily by Apple's (NAS: AAPL) iPad. It's no wonder that both companies have been scrambling to expand beyond the PC business, and making big pushes into IT software and services.

That's also one reason why HP is revamping its mobile efforts with a newly formed division to focus on consumer tablets, and the launch of Windows 8 later this year has a lot of potential in contributing to HP's turnaround, although it will be competing directly with Microsoft there, with its Surface tablet.

2013: The Year of HP?
We knew 2012 was going to be ugly for HP, we just didn't how ugly. After becoming CEO last year, Meg Whitman admitted that 2012 would be a year of transition, and laying down the foundations for HP's turnaround. She's betting on 2013 to really be HP's year to shine and, at this rate, it won't take much for it to be a better year than this one.

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The article HP Follows In Microsoft's Impairment Footsteps. Is it 2013 Yet? originally appeared on Fool.com.

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