HP Could Cut 30,000 Jobs by Separating Into Two Companies
At HP’s 2015 Securities Analysts Meeting on Tuesday, the future Hewlett Packard Enterprise Company leadership team provided a strategy update and financial outlook for the new company.
Meg Whitman, current chairman, president and CEO of HP, who will become president and CEO of Hewlett Packard Enterprise, gave an overview of how the new company will build on its leading position in infrastructure, software, services and cloud to help enterprise customers address their four most pressing challenges:
- Transforming to a hybrid infrastructure that gives greater flexibility and agility, while ensuring that there is no disruption to legacy systems.
- Protecting the digital enterprise from external risk.
- Empowering the organization to use data to give the insights needed to anticipate risk and opportunity.
- Enabling workplace productivity by delivering the right tools that are optimized for business critical tasks at the right economics.
The new Hewlett Packard Enterprise will have more than $50 billion in annual revenue and will be focused on delivering unrivaled integrated technology solutions to a market that has the potential to exceed $1 trillion over the next three years. Hewlett Packard Enterprise will trade under the ticker symbol "HPE."
"Hewlett Packard Enterprise will be smaller and more focused than HP is today, and we will have a broad and deep portfolio of businesses that will help enterprises transition to the new style of business," said Whitman. "As a separate company, we are better positioned than ever to meet the evolving needs of our customers around the world."
Tim Stonesifer, who will become chief financial officer of Hewlett Packard Enterprise, provided a financial outlook for Hewlett Packard Enterprise in fiscal 2016. As a standalone company, Hewlett Packard Enterprise expects fiscal 2016 revenue to grow year-over-year in constant currency driven by continued strength in servers, storage and networking, and stabilization in services and software. The company anticipates currency impact to be a three point headwind to revenue growth in fiscal 2016.
Hewlett Packard Enterprise anticipates operating profit dollars to grow year-over-year in fiscal 2016, due to the continued focus on supply chain productivity, disciplined approach to discretionary spending and efforts to reshape the workforce. The new company estimates fiscal 2016 non-GAAP diluted net EPS to be in the range of $1.85 to $1.95, and estimated GAAP diluted net EPS to be in the range of $0.75 to $0.85.
Fiscal 2016 non-GAAP diluted net EPS estimates exclude after-tax costs of $1.10 primarily related to restructuring charges, separation costs and amortization of intangible assets.
Cash Flow Hewlett Packard Enterprise expects to generate approximately $5.0-$5.2 billion in cash flow from operations and $2.0-$2.2 billion in free cash flow in fiscal 2016. This includes separation cash payments of $0.4 billion and restructuring cash payments of $1.2 billion.
Excluding these separation and restructuring payments, HP expects Hewlett Packard Enterprise's normalized free cash flow to be approximately $3.7 billion in fiscal 2016.
Capital Allocation Approach
Stonesifer stressed that Hewlett Packard Enterprise will maintain a disciplined capital allocation framework to drive shareholder value, and expects at least 50 percent of free cash flow in fiscal 2016 to be returned to shareholders through approximately $400 million in dividends and the remaining in share repurchases.
Restructuring Related Activities
Stonesifer presented a clear plan to deliver $2.7 billion in ongoing annual cost reductions both associated with the separation and specific to the Enterprise Services ("ES") business.
These new activities will enable Hewlett Packard Enterprise to achieve $0.7 billion of ongoing cost savings associated with the separation, including adjustments to real estate strategy and other reorganizations across the portfolio.
In addition, it will enable ES to achieve $2.0 billion of gross annualized cost reductions, helping ES achieve a long-term, sustainable 7-9 percent operating profit margin.
To achieve these savings, Hewlett Packard Enterprise expects 25,000 to 30,000 people to leave the company, primarily associated with the ES transformation.
This will result in a GAAP-only charge of approximately $2.7 billion, beginning in the fourth quarter fiscal 2015. The cash impact will be approximately $2.6 billion over the next three years, beginning in fiscal 2016.
"These restructuring activities will enable a more competitive, sustainable cost structure for the new Hewlett Packard Enterprise," explained Whitman. "We've done a significant amount of work over the past few years to take costs out and simplify processes, and these final actions will eliminate the need for any future corporate restructuring."
Cloud Strategy Update
Whitman provided an overview of Hewlett Packard Enterprise's cloud strategy, and how the company is uniquely positioned to help customers migrate more of their applications and services to a hybrid cloud environment.
HPE Helion ensures that customers' applications are deployed to the right IT environment—based on business requirements like security levels, service availability and regulatory compliance—making it easier to build, manage and consume workloads in a hybrid IT environment.
Hewlett Packard Enterprise's hybrid infrastructure strategy is consistent with market data that shows that a combination of traditional IT and private clouds will dominate the market for the foreseeable future. Nearly 90 percent of IT spend over the next three years will be in traditional IT and private cloud.
The company expects cloud revenue in fiscal 2015 to be approximately $3 billion, growing over 20 percent annually for the next several years. This estimate includes revenue from our enterprise group, software and enterprise services segments which support customers' cloud build and consume.
Over the course of the day, the future Hewlett Packard Enterprise management team provided updates on business segments, including:
- Mike Nefkens, executive vice president and general manager of Enterprise Services ("ES"), gave an overview of the progress ES has made over the past three years and the opportunity ahead. ES, which will be critical to Hewlett Packard Enterprise's solution-based approach, is delivering accelerated profit growth and revenue stabilization in constant currency
- The cost reduction program, including the $2 billion restructuring program, is driving operating profit improvement and will result in a long-term, sustainable, market competitive cost structure with a 7-9 percent operating margin by fiscal 2018.
- Given the importance of Enterprise Services to the overall turnaround strategy, HP provided an outlook for ES for fiscal 2016. Revenue is expected to be flat to down 2 percent year-over-year in constant currency, however, with continued focus on cost management and operational improvements, operating margin is expected to further improve to be in the range of 6-7 percent for fiscal 2016.
- Approximately 37 percent of Hewlett Packard Enterprise's revenue will come from ES.
- Robert Youngjohns, executive vice president and general manager of Software, discussed the performance of the business and the essential role of Software in the go-forward strategy of Hewlett Packard Enterprise.
- HPE Software is margin accretive with good cash flow, and serves as an intellectual property anchor in the new style of business.
- Youngjohns discussed the growth products and areas of investment of Software, and outlined a clear strategy to position Software for long-term growth, including continuing to focus the portfolio around key growth areas.
- Approximately 7 percent of Hewlett Packard Enterprise's revenue will come from Software.
- Antonio Neri, executive vice president and general manager of Enterprise Group ("EG"), gave an overview of the strategy, performance and key areas of the portfolio that are driving the future of EG.
- EG financial performance has been strong in fiscal 2015, driven by cost reductions, innovative product introductions, a new leadership team and a stronger go-to-market strategy
- Hewlett Packard Enterprise anticipates the overall market for EG to grow at a 3 percent CAGR, and certain markets such as converged infrastructure, Cloud Hardware and Network Functions Virtualization, to grow at an even faster pace.
- Approximately 50 percent of Hewlett Packard Enterprise's revenue will come from EG, spread across servers, storage, networking, and technology services.
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