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Why HP Needs to Cut More Jobs

Stocks in this article: HPQ

Updated from 10:23 a.m. to include updated share price and additional thoughts from Pacific Crest analyst.

NEW YORK (TheStreet) HP (HPQ) reported fiscal second-quarter earnings last night, with initial attention focused on the premature release of the numbers. However, continued layoffs at the Silicon Valley tech giant, to the tune of an additional 11,000 to 16,000 jobs, have shifted attention back onto HP's restructuring plan.

In May 2012, HP adopted a multi-year restructuring plan to cut 34,000 jobs to re-engineer its workforce. The company increased the size of its workforce reduction on Thursday, saying that it plans to cut an additional 11,000 to 16,000 jobs.

On the earnings call, CEO Meg Whitman addressed adding to the layoffs, citing the long-term efficiency benefits to HP. "We've actually increased the number of people who will leave the company a couple of times during this program," Whitman stated on the call. "And actually on earlier call, we actually signaled that there might be more opportunity. And I am actually not disappointed at all with how we're doing, we just see more opportunities to lower our cost structure, streamline our operations without impairing our effectiveness in fact making us a more nimble and decisive company."

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CFO Cathie Lesjak added that the cuts give HP the opportunity to"create more capacity to invest," noting that the tech giant's turnaround hinges on the company's ability to innovate and bring new solutions to the marketplace that are different to the competition's.

Whitman said that since she joined HP in Sept. 2012, she's seen additional opportunities where the firm can shrink in size and get better. "It [the layoffs] will be across almost all the business units and across all the geographies and particularly in some of the functional areas that sort of help the businesses grow," Whitman stated. "So listen I'm not at all disappointed, I think it's the natural course of what makes sense in a turnaround of this size and scale."

For the fiscal 2014 third quarter, HP estimates non-GAAP earnings between 86 cents and 90 cents a share. For fiscal 2014, HP said it believes non-GAAP earnings will be between $3.63 and $3.75 a share. The company will take a 95 cent a share GAAP charge "related primarily to the amortization of intangible assets and restructuring charges."

It appears that though HP was able to meet second-quarter earnings estimates of 88 cents a share, the company still has much work to do to really grow the top line, a fact not lost on Wall Street. HP generated $27.3 billion in revenue, while analysts surveyed by Thomson Reuters expected $27.42 billion in sales. 

Shares of HP fell yesterday, tumbling 2.3% to $31.78 following the early earnings release, but were soaring in early Friday trading, gaining 5.6% to $33.56 as investors digested the conference call.

The company noted in the release that cash flow from operations was $3 billion, and it returned $1.1 billion to shareholders in the forms of dividends and buybacks during the second quarter. Net cash improved by $1 billion, the ninth consecutive quarterly improvement of approximately $1 billion or more.

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