HP CEO outlines a turnaround strategy promises another tough year as it heads toward full rebound by 2016
Computerworld – Hewlett-Packard CEO Meg Whitman says she won’t be able to say whether she has completely turned this company around until 2016.
That was Whitman’s message Tuesday to financial analysts in a presentation that was part history lesson, part predictions and finally a summation of whatnow seems obvious. HP has not been “as competitive as we need to be,” she said.
Whitman’s outline for fixing HP includes improving its internal IT systems, reducing the number of products it sells, and bringing stability to the organization, something she says has already been accomplished under her watch.
The bad news for the financial analysts is that a turnaround that takes HP to “industry leading margins” won’t be accomplished until 2016.
Next year will continue to be rough in part because of a retreat in spending by worldwide consumers and China. By 2014, though, the investments HP is now making will begin to pay off, said Whitman.
HP has probably done all it can do to explain its problems.
Now it’s trying to explain how it will get past a legacy of boardroom turmoil, executive reshuffling, and more recently, disappointing quarters.
HP posted an $8.9 billion loss in the third quarter ended July 31. The company had earlier said it would take an $8 billion charge against its services division, when stems from its $13.9 billion acquisition of EDS in 2008.
The company this year has announced layoffs that to date amount to about 29,000 workers.
The recent financial performance “has not been good,” said Whitman.
From the peak in the fourth quarter of 2010, HP has seen a multi-quarter decline in revenues and operating margins, she said.
Perhaps surprisingly, Whitman put some of the blame for the company’s woes on its IT systems, which she said has hurt the company’s internal operations.
HP has not had “a compelling sales management system or CRM system for years,” said Whitman.
Just this year, HP made a decision to move to Salesforce.com, “which we believe will yield real, tangible results” in improving operations, she said. HP is also moving to the Workday HR platform.
HP has seen much turbulence in its corner offices over the last decade, but Whitman wanted analysts to see how much the company itself has managed to change over that time.
Ten years ago , Whitman said, “HP was essentially a printing company.”
At the time, the printer business accounted for more than 40% of revenue — and more than 95% of profit. Today, the unit accounts for about 20% of revenue and 30% of profit, so HP is now a far more diversified company, she said.
Whitman praised two of her predecessors, Carly Fiorina and Mark Hurd, for assembling “a very powerful set of businesses [that] can provide terrific customer solutions and excellent shareholder value.”
The largest acquisitions by the two former CEOs were Compaq by Fiorina in 2002 and EDS under Hurd’s watch in 2008.
HP’s EDS unit has faced problems that can be traced to having four different leaders in as many years, she said. The CEO disruptions resulted in changes in strategy and a reliance on short-term fixes that did not help the company, Whitman said.
She also noted that HP has too many products. In the printing division alone, she noted, there are some 2,100 laser printers. She expects that number to be cut by nearly 50% over the next year.
“In every business were going to benefit from focusing on a smaller number of offerings that we can invest in and really make matter.”
HP CEO Meg Whitman made her case for the company in an analyst powwow, but the underlying message is that the IT giant has been rattled by executive turnover and it’ll take time to right mend its struggling units and balance sheet.
Meanwhile, HP’s outlook for fiscal 2013 will fall short. HP CFO Cathie Lesjak said the company expects non-GAAP earnings of $3.40 a share to $3.60 a share with revenue declines of 11 percent to 13 percent.
Wall Street was looking for fiscal 2013 earnings of $4.18 a share. HP is seeing weakness across the board.
Whitman’s message had a familiar refrain to it. In fact, Whitman’s chat sounded like recent earnings conference calls. Among the key points:
- HP is No. 1 or No. 2 in each of its major markets and has a trusted brand.
- The company has diversified from printing as a cash cow.
- But CEO turnover has killed HP’s continuity. “The single biggest challenge at HP is the changes in CEOs,” said Whitman. In other words, HP has had inconsistent plans.
- EDS, now HP services, will take time to fix.
- HP now has a more “compelling” CRM system in Salesforce.com.
- Mobility, cloud and hyperscaling are market changes HP must navigate.
- Add it up and Whitman said her first year is a rebuilding year, profits will decline in enterprise services and 2014 will show “real recovery.” By 2015, HP will be humming.
The catch there is no “silver bullets.” Indeed, HP’s biggest issue may be that it is spread a bit thin.
Going forward, HP will focus on cloud, security and information in the enterprise. Technology services will be integrated into the enterprise unit in 2013.
Whitman also was optimistic about PCs and printers, but noted HP needs to close product gaps. Multifunction printers are an issue.
HP CFO Cathie Lesjak walked through the balance sheet and realities facing the company. Lesjak said bouncing back to a mid-single A credit rating was a priority and HP needs to cut its debt position.
Bottom line: HP is retooling amid “deteriorating market conditions” with spotty execution.
Analysts going into HP’s powwow weren’t expecting any fixes and they were basically on target.
Barclays analyst Ben Reitzes said in a research note:
We believe HP still has structural issues that simply need time to play out. We believe the most important items to address are 1) the trajectory of free cash flow and plans for debt reduction, 2) how HP can stabilize the PC and printing businesses, 3) plans to reposition ESSN to achieve faster growth and 4) initiatives to revitalize and stabilize Services margins.
HP execs addressed some of those concerns, but the key variables here are time and patience. HP needs time to mend. Investors will need patience. Customers may need some too.
Shares of HP took a hit in afternoon trading.