Hewlett-Packard Earnings Top Expectations, but Revenue Falls

But while H.P. outperformed the diminished expectations Wall Street had for the quarter, revenue was lower in five of its six business segments, and demand for key products like personal computers collapsed.

In an interview, Ms. Whitman said that she had built up H.P.’s cash position and lowered its debt, while retooling businesses and shuffling executives, as part of an overall plan to move one of the world’s largest information technology companies to “a new style of I.T.”

In that world, businesses and consumers will rent software over the Internet, and pay for technology-infused experiences like the ability to print from a mobile phone to a kiosk at a FedEx store, as much as they now buy H.P. mainstays like laptop computers and printers.

“This is a pretty big change,” she said. “We need to do it with speed, and we need to leverage it with scale.” In PCs, H.P.’s biggest business, she said, the company has to cater to “people’s desire to personally compute,” using a variety of devices and technologies.

“We haven’t broken through that,” Ms. Whitman said.

Some of the progress, in things like new kinds of tablet computers that use Google’s Android operating system instead of the Windows software from Microsoft, will be seen over the next few weeks, as H.P. offers a number of machines for the Christmas season. Other efforts, like the kiosk printing, three-dimensional printers, or H.P.’s own so-called cloud computing business, may not show significant revenue for several years.

Analysts appeared content with H.P.’s results, while warning about the difficulties ahead. H.P. reported net income of $1.41 billion, or 73 cents a share, in contrast to a loss of $6.85 billion, or $3.49 a share, in the period a year earlier. Revenue was $29.1 billion, a drop of 3 percent from a year ago.

The net income, excluding charges, was $1.01, above the expectations of Wall Street analysts. They had expected $1 a share and revenue of $27.91 billion, according to a survey of analysts by Thomson Reuters. The news sent H.P. stock up more than 5 percent in after-hours trading.

Nonetheless, revenue from consumer PCs fell 10 percent. Revenue from software, an essential growth area for the company, fell 9 percent from a year earlier (in part related to a large sale H.P. made in 2012, making comparisons with new earnings difficult). Sales of business hardware, the only business segment to rise, were up a modest 2 percent.

H.P. returned cash to shareholders in the form of a dividend payment, but cut research and development spending by $180 million, a big slice from the $909 million spent in that area a year ago.

“They’re very challenged longer term,” said Bill Kreher, an analyst with Edward Jones. “Most people view this as a restructuring, or a turnaround story. It’s going to be so hard for them to get away from their old hardware businesses.”

H.P., one of the oldest companies in Silicon Valley, was blindsided by advances like smartphones, tablets and cloud computing, all of which have hammered its core businesses, as well as turmoil in its executive ranks. Ms. Whitman, who came on board in September 2011, was the company’s third chief executive in just over two years.

“We still have a lot of work to do,” Ms. Whitman said, adding that she would not get H.P. into businesses like smartphones as an alternative to PCs unless she saw a means to success in that business. “It’s hard to figure out how to make money in that,” she said.

Common Sense: Hewlett-Packard and Its Obstinate Director

Would that it were so easy.

“Each one of our directors considered the results of our recent shareholder meeting and made the personal decision to do what they felt was best for H.P.,” the company’s new interim chairman, Ralph Whitworth, said. “Today’s announcement is a testament to our chairman’s and departing board members’ statesmanship and sterling professional standards.”

But to the dismay of some directors and shareholders, when it came to Mr. Lane, it took the combined efforts of the company’s chief executive, Meg Whitman, other board members and Dodge & Cox, the mutual fund company that is H.P.’s largest shareholder, to get Mr. Lane to give up the chairman’s title, people with knowledge of the board’s deliberations said. Even then, Mr. Lane refused to leave the board entirely, and other directors were unwilling to force the issue.

H.P. is hardly alone when it comes to the delicate issue of resignations by board members. Even in the rare instances when shareholders vote against proposed directors, it can be difficult to persuade one to resign. And if they don’t, the only way a board can remove them is by not nominating them at the next election. “It’s a huge issue,” said Anne Simpson, director of corporate governance for the California Public Employees’ Retirement System, the giant California state pension fund. Calpers voted against Mr. Lane and several other H.P. directors.

After a tumultuous few years in which H.P.’s board hired and then fired a new chief executive, acquired the software maker Autonomy for $11.1 billion and then wrote off most of the investment, and watched its stock price plunge more than 50 percent, some major shareholders and proxy advisory services recommended shareholders withhold their votes for several directors. Although all the directors were re-elected, Mr. Lane and two other directors, John Hammergren and G. Kennedy Thompson, received less than 60 percent of the vote, which by the standards of shareholder democracy is considered a repudiation.

When the board met to consider how to respond, Mr. Hammergren and Mr. Thompson readily agreed to step down, according to several people knowledgeable about the deliberations. They said Mr. Hammergren had wanted to resign even before the election, but was persuaded to run because of the difficulty at the time of finding a new candidate given the much-publicized turmoil at the company.

But Mr. Lane was another matter. Dodge & Cox voted its shares against Mr. Lane, which is considered especially significant because the San Francisco-based company almost never votes against management recommendations. According to disclosure forms covering the period from January 2009 through June 2012, Dodge & Cox supported management’s recommendations on directors 100 percent of the time. Dodge & Cox executives met with Mr. Lane to explain the firm’s reasoning.

Asked for comment, Charles Pohl, co-president and chief investment officer at Dodge & Cox, responded, “Dodge & Cox addresses corporate governance in many ways, from discussions with management to at times withholding votes for directors.”

Mr. Lane also met privately with Ms. Whitman.

Mr. Lane told me this week that he listened to what Dodge & Cox had to say, but that the only message he heard was that the board wanted him to stay, and that any notion he had to be pressured is “fiction.” He continued: “I didn’t feel any pressure at all other than the pressure of the vote. If you get less than an 80 percent vote, it’s something you have to think about. I told the board I’d leave any time they wanted and they said, ‘No, please don’t leave.’ I stepped down as chairman because I thought it was the right thing to do.”

Charles Elson, a professor of law at the University of Delaware and an expert on corporate governance, questioned Mr. Lane’s continued membership on the board. “If it’s true that other directors and shareholders want you to depart, and you don’t, it’s very difficult to do your job effectively. You’ve become a lightning rod. Your presence may be detracting from the company. Why would you want to stay?”

Meg Whitman’s Toughest Campaign: Retooling Hewlett-Packard

IT’S not as easy being Meg Whitman as Meg Whitman might have expected.

At 56, Ms. Whitman, the eBay billionaire who spent a fortune unsuccessfully trying to become the governor of California, has found her Act III. She has been chief executive of Hewlett-Packard for a little more than a year, and many people are still waiting for her to get her message out about the place.

Here it is:

Meg Whitman believes in H.P., and believes that this company matters to Silicon Valley, to California, to the world. She believes that Wall Street doesn’t quite get it — doesn’t quite see the promise she sees. She believes that mobile devices, cloud computing and Big Data will re-energize H.P., a company that for a decade has grabbed more headlines for boardroom soap operas than for bold innovation.

“I believe in creative destruction,” Ms. Whitman says in a conference room near her executive cubicle.

Even, it seems, when the stakes include her company and reputation. In all likelihood, this is Ms. Whitman’s last great public performance. She became rich by building eBay, then spent more money than any candidate for public office in the nation’s history trying to become California’s governor. She was sometimes portrayed in that race as an aloof 1 percenter — as someone who pushed around subordinates, once literally, and who was unkind to her housekeeper, an illegal immigrant. “I left a little bruised,” Ms. Whitman, a Republican, says of the 2010 race she lost to Jerry Brown. “It was hard, it was personally very hard.”

So now Ms. Whitman is focusing her energy on H.P., the company founded by the tech legends William Hewlett and David Packard. Bill and Dave, as they are referred to at the company, spawned Silicon Valley. Last year, H.P. posted revenue of $127 billion. It employs 320,000 people directly, and easily that many again through a network of manufacturers and computer resellers across 170 countries.

Ms. Whitman has plenty of impressive-sounding stats at her fingertips. H.P., she says, employs thousands of people in Costa Rica, Houston and Boise, Idaho. “In India, we have 60,000 people,” she says. A new program for selling printer ink is in exactly 87 countries. Every 15 seconds, the company turns out 60 new printers, 30 personal computers and one powerful computer server. Still, she yearns for even more data, something closer to the command of the day-to-day process she had at eBay.

THE fact is, H.P. isn’t what it used to be. Next to Apple or Google, it looks like a bit of a loser. In the most recent quarter, as Apple soared to new heights, H.P.’s revenue fell 5 percent and its operating margins dwindled. Profit margins at I.B.M. and Apple are several times that of H.P. And H.P.’s share price, at just over $17 on Friday, is about where it was in 1995.

“It’s staggering,” says A. M. Sacconaghi, an analyst at Bernstein Research. “This is now the cheapest big stock in the last 25 years. That reflects an industry belief that the company is going to decline.”

Ms. Whitman is impatient to move H.P. closer to a global computing explosion that is transforming the industry. Smartphones and tablets from Apple, Google and others are now flying into consumers’ hands worldwide. Those computers are tied via the Internet to cloud computing data centers operated by Amazon, Microsoft, and hundreds of multinational companies. Information from all the consumer devices, in addition to data from billions of sensors and Web-crawling robots, is crunched in these supercomputing clouds, creating a Big Data revolution full of business opportunities and dangers.

From Ms. Whitman’s high vantage, the trends of mobile, cloud and Big Data resolve into a single phenomenon: the creation and exploitation of Information Everywhere. H.P. makes consumer devices, in addition to servers for the cloud, sensor networks, and analysis software. Instead of standing at the confluence of the phenomenon, though, H.P. is on the sidelines, with most of the parts but none of the integration to make it a leader.

This article has been revised to reflect the following correction:

Correction: September 30, 2012

An earlier version of the text of the slideshow accompanying this article referred imprecisely to the reasons that Carly Fiorina left Hewlett-Packard.  She was fired amid uneven business execution and not because of a corporate spying scandal. (The spying incidents came to light after she left.) The slideshow also referred imprecisely to the dismissal of Mark Hurd. He resigned amid charges of inappropriate conduct with a female contract employee, not an female employee of the company.