HP's Apotheker: Does he have the capital to act long-term?

HP's Apotheker: Does he have the capital to act long-term?

Summary: HP CEO Leo Apotheker is like a politician that burned through his political capital in six months. Without short-term wins, HP doesn't have the goodwill to catch a break and invest for the long term.

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Hewlett-Packard CEO Leo Apotheker is having a bad day. The company cut its outlook for the second consecutive quarter and HP is quickly falling out of Wall Street's good graces. Apotheker's challenge: Invest in the long-term, fix HP Services, weather a consumer PC meltdown and hit quarterly targets.

Apotheker is like a politician who burned through his political capital in six months. Without short-term wins, HP doesn't have the goodwill to catch a break and invest for the long term.

HP is caught in the typical long-term vs. short-term debate. Wall Street wants results and better-than-expected earnings every quarter. But businesses need to invest in the long run. Amazon needs to build out its infrastructure. Google needs to build data centers. Verizon decides to build its FiOS network much to the chagrin of analysts at the time.

How these companies are treated when they take an earnings hit is largely the result of how much goodwill the CEOs have. Amazon's Jeff Bezos is cut slack because he's blown off Wall Street before. Google's Larry Page has no track record yet so doesn't get that slack. Apotheker chafes at the short-term view, gets snippy on CNBC and lacks the track record at HP. Apotheker is also capital deficient because he follows a CEO---Mark Hurd---that beat estimates repeatedly (arguably at the expense of long-term results). And then there's Apotheker's SAP track record, which wasn't a model of Wall Street relations.

This context came to roost as Apotheker went through HP's second quarter. The quarterly results were fine, but the 2011 outlook looks weaker than expected. Part of it is consumer PC demand. HP is also seeing a lack of margin growth in HP Services, which was milked to make previous quarters.

It's hard to argue that Apotheker has the right idea---balance long-term and short-term and think about ongoing customer relations. The big question is whether Apotheker will have the time to carry out his master plan.

Let's look at the comments:

There are new market realities in this evolving world and some companies will pay lip service to change, but fail because they will be stuck trying to protect their legacy business models. The winners will be companies who not only talk about the future, but also actually evolve their strategies and adjust their business accordingly. At HP, we intend to lead by making the right customer-focused decisions to take advantage of the changing technology landscape and by executing aggressively on our long-term strategy. As always, these decisions need to be balanced, with a focus on operational efficiency and prudent financial discipline.

Translation: HP has to change and make a few bets at the expense of earnings.

I have concluded that we had a solid strategy for Services, but we didn't invest in the [path] to support the strategy. Instead, HP focused on maximizing its shorter-term margins. We have overexecuted operationally and underinvested strategically. As a result, our short-term margin expectations have been too high. This has impacted our ability to create sustainable growth for the long term. In particular, we have not yet shifted our Services mix to higher value, higher-margin and higher-growth categories. You have seen it in our historical results. Our margins have expanded quickly and significantly, but our revenue has not grown as fast as it can or should, and our mix of ITO Application Services, BPO and NTS, has been unchanged over the past several years. The same is true when I look at recent signings, which have been heavily weighted towards longer-term ITO deals. As we add ITO deals, our margins are pressured as we (inaudible) faster than revenue during the startup phase. We want these ITO deals, but our customers are asking us to expand our application and BPO capabilities more quickly.

Translation: Blame Hurd for the lack of HP Services growth.

We will deepen industry content and form a Business Solutions Group to create more strategic value for our customers. We will enhance our Services offerings in emerging areas, such as cloud services and consulting, application modernization, business analytics and mobility. Third, we will continue to enhance our delivery and sales capabilities. We will be increasing our bench strength in our Application Services business. We will continue to invest in our sales, business development and delivery capabilities to increase customer satisfaction. Finally, we will continue to have a tight focus on operational excellence. We will move forward with modernizing our data centers and rationalizing processes, leveraging HP software. This is my top focus going forward.

Translation: Think of this as IBM-esqe.

We will not abandon our prudent M&A approach. We want to make sure that we are financially prudent and strategically wise and that we are mindful of shareholder value. But we are scanning the market. We are actively engaged, and as in the past, we will be looking at acquisitions in order to [further] the portfolio or at organic growth or at partnering.

Translation: HP is looking to make an acquisition, but a falling stock price doesn't help matters.

We are making tough decisions today to set us up for the future. And in the long term we have multiple levels to drive our EPS growth. But investments we are making today will help create sustainable growth, including sustainable EPS growth, and we are focused on improved business mix and continued operational excellence, including a better mix in each one of our businesses.

Translation: Brace yourself for a rocky ride.

Topics: Hewlett-Packard, Banking, CXO, Enterprise Software, Hardware, Outsourcing

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6 comments
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  • Apotheker is no magician: if the whole PC market is on "soft" side, ...

    ... actually, in slight decline (which would be less slight if to exclude Apple's ever growing Macintosh business): there is not much he can do about it.
    DDERSSS
    • True enough, but things can be different

      @denisrs
      you figure his competition is about 20 times larger then Apple's as he has Dell, Acer, ect going after the same markets he is.
      His trick is to take sales from the others, so even if overall PC sales drop a bit, HP can still grow.
      Will Pharaoh
    • RE: HP's Apotheker: Does he have the capital to act long-term?

      @denisrs

      Not to discount Apple's obvious inroads into the PC market, or the copious profits they make from it, but issues facing PC manufacturers really have very little to do with Macs.

      The future of computing for most of the population is going to look increasingly more like a cell-phone or an ipad than a PC. PC manufacturers are struggling to understand what that future will truly look like and how they can structure themselves to transition.

      Any company which does not make hard choices in an effort to meet that transition is going to end up like Nokia: bleeding and throwing a hail mary in an attempt to stay relevant. Apotheker knows this.
      SlithyTove
    • RE: HP's Apotheker: Does he have the capital to act long-term?

      @denisrs

      Not true. Intel isn't falling short on orders, and still has negligible presence in the mobile market. The fact is that Hurd smashed HP. He slashed the EDS and services, which are down. He slashed R&D, and now people don't want to buy HP computers which on the whole are inferior to the line up they released a year and a half ago. Meanwhile, you can't say it's just because PCs and printers are old news, because that same antipathy towards R&D has them releasing their tablets dead last. Everyone who purchased stock from Hurd deserves what's coming to them.
      tkejlboom
  • HP is directionless

    Substandard products in certain product lines (HP p3005 was an absolute lemon in terms of electronics; 2420 series printer was prone to stripped gears) have soured people on the brand.

    What happened to: If you want to do something, do it right? You can't be all things to all people and still do it right.

    Our company was exclusively HP, but we now just go with what's cheapest at the time we need it. The the past two years since making that decision, there is no appreciable negative impact. We still get the odd lemon, but the cost savings are a no brainer.
    croberts
  • RE: HP's Apotheker: Does he have the capital to act long-term?

    No! 2 Companies ( HP, Dell ) same industry, same challenges. Michael Dell sees the challenge and responds to it and has a positive attitude to the future. Leo A does nothing for 6 months and now blames Hurd ! Not sure he has the experience or leadership to turn HP aroound ?
    chottukhanna