HP's latest do-over: Skepticism abounds

HP's latest do-over: Skepticism abounds

Summary: Analysts reserve praise for HP's restructuring. Why? HP has repeatedly restructured to no avail.

TOPICS: Hewlett-Packard

HP's move to cut 27,000 jobs, reinvest in research and development and generally get the company on better footing sounds promising on paper. Unfortunately for HP CEO Meg Whitman too many people have heard this song and dance before.

In other words, there's a lot of skepticism about whether HP can get its innovation mojo back. To recap, HP posted better than expected earnings and announced a restructuring. To its credit, most of the restructuring savings will go to R&D. Former CEO Mark Hurd cut 50,000 jobs in five years and cut R&D.

Related: HP cuts 27,000 jobs, to plow savings into R&D | HP beats the odds on Q2 earnings despite looming layoffs | CNET: Hewlett-Packard just whacked the wrong executive

Whitman said on HP's earnings conference call:

I would say that our performance began to stabilize. We saw some bright spots. There's still an awful lot of work to be done and we're looking at every option to accelerate the pace. As discussed during our Q1 call, we are working very hard to better align HP's cost structure with its revenue profile. We’re streamlining and removing complexity at every turn, and in the process, we're creating the capacity to invest in innovation and quality. And over time, we're of course thinking about how we can drop some of our savings to the bottom line.

HP shares are up a bit the day after the company's results, but few analysts are calling the turnaround. In fact, HP's restructuring is being portrayed in some camps as a move that won't alter the reality the company could be facing businesses stuck in a secular decline.

Here's a sampling of the post-game analysis after what appears to be a positive first step for HP.

Barclays analyst Ben Reitzes:

HP’s revenue, earnings, annual guidance and overall commentary were all better than expected heading into this report, especially given Dell’s comments just a day ago. While we believe any turnaround will be a multi-quarter effort for HP, investors are likely to see this report as a positive first step. That said, in the context of demand deterioration in Europe and secular pressures still in many businesses into 2H12, we still believe it may be too early to make the call for a sustainable turn.

Big concern: HP's software business reported revenue of $970 million, well below his estimates. Turns out Autonomy's business fell off dramatically. Autonomy chief Mike Lynch will leave to be replaced by Bill Vegte. HP spent $11 billion for Autonomy and "its rapid shortfall is troubling," said Reitzes.

Deutsche Bank analyst Chris Whitmore said:

We note that past restructurings (~50K headcount reduction over 5 years under Hurd) have done little to improve HP’s competitive position or reduce its reliance on declining or troubled businesses (printing, PC, Itanium, etc), nor improve its market share trajectory in storage or servers. We therefore adopt a ‘wait and see’ approach to this latest round of restructuring and its impact in overturning deteriorating company fundamentals. Barring a significant change in strategic direction, we anticipate protracted declines in HP’s three major businesses (services, printers, PCs).

Big concern: "Looking forward, services will likely remain under pressure for several quarters due to reduced headcount and poor competitive positioning (competitive bidding, attracting and recruiting higher margin service capabilities, re-investment, etc)," said Whitmore. Evercore analyst Rob Cihra said:

HP has already taken more than $5 billion in restructuring charges over the past 7 years, and yet we think its competitive position has only eroded. In fact, from an innovation and value-add standpoint, we tend to think HP already cut “too” far, and yet is now going back to the well. When including amortization, the gap between HP’s GAAP and non-GAAP earnings just keeps getting wider, having already jumped to $3.3B in FY11 vs. $2.1B in FY10, all while cash flow keeps declining.

Big concern: Erosion will hit all of HP's key businesses. "We see erosion across practically all of HP's consumer and commercial PC, printing, enterprise, and services businesses.

Topic: Hewlett-Packard

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  • It's the Hurd way, of course.

    And it has worked before. They just need a direction for R&D which Meg is not qualified to do. Kinda like Yahoo.
  • Meg Whitmen and HP

    The worst thing for any technology company is to be taken over by the finance guys(or girls). Moving in the direction of more money in research is a good thing, but the direction of the research is what is important. Meg understands the net well, but we will have to see how well she does in development of hardware.
    • Outsource the CEO

      Get someone like Vikram Pandit to relocate to India with HP's Tech Support and pay him $1
  • Lipstick on a Pig...er...Meg

    Meg is a buffoon... She doesn't have a clue how to innovate nor foster it... She was just a schmoe who happened to be in the right place at the right time and that was a long time ago. She is a plus sized Carley 2.0.
    • That is going a bit far...

      I wouldn't call Meg a buffoon. She turned the computer fiasco around, and as bad as she is, she is probably better then the last three CEO's HP has had.
      • last three?

        What is wrong with Hurd, who was making everything better and better?
      • I agree.

        It's the HP board and their poor decisions that got HP into this mess in the first place.
    • u8thecarley

      Really? So what multi-billion dollar corporation are you CEO of?
  • In Meg's defense.

    She is smarter than heck. She knows people and can get max from them. Proly good with finance too. No one knows if she has the hardware or tactical vision for HP. Yet. Maybe she can pull it off. Maybe not. I do know she showed incredible poor judgement running for CA gov and I just can't see that the blindness in that case is a positive indicator for anything. Massive ego will get you or the company nowhere in this business. See Carly Fiorina, for example.
    • Meg Whitman has disadvantages

      Ginni Rometty(IBM) has Sam Palmisano to mentor her...
      Mark Hurd(Oracle) has Larry Ellison to mentor him...
      Jeffrey Clarke(Dell) has Michael Dell to mentor him...

      Rometty and Clarke have been with their respective companies for a long time... Hurd has been in the hardware/services/software industry for a long time.. and has unique knowledge of HP. Whitman is coming in from the outside and is not as intuned with the specifics...yeah she has web familiarity, but she is now learning hardware/services from scratch compared to her counterparts, in addition to having to learn the company infrastructure.

      The question is, what is the board thinking... You've got this multi-headed mess.. and you brought an OUTSIDER to do WHAT exactly? Clean house... downsize...(read shed divisions) If you want to maintain the status quo... and to try and just right the ship... rather than rebuild it, you should have gone with an INSIDER.

      She has been there for 9 months now.. R&D has increased very little... and they need to do R&D beyond the 'me too'.
      • Agree

        Agree on the R&D. It is not so much a matter of just saying "we are going to increase R&D." Even if they do increase R&D, they need someone with a strategic direction and a deep knowledge of the technology industry to determine what to invest in from an R&D perspective. Meg Whitman certainly doesn't have those skills.
  • These are not the droids you're looking for.

    The analysts are looking at numbers or looking out the window and seeing inclement weather.

    I would be worried, were I an HP shareholder, just by reviewing the comments at the call.

    Just for yuks, forget E-bay, forget overpaying for Skype and not getting the rights to modify it, forget running for California governor, forget it's Meg Whitman.

    Let us quote and translate, a la The Macalope (though with far, far less wit), and let the corporatese wash over and become the dull buzz it was destined to be:

    I would say that our performance began to stabilize.

    - Not stable yet.

    We saw some bright spots. Theres still an awful lot of work to be done and were looking at every option to accelerate the pace.

    - Every option to accelerate the non-specified pace. Epochal to glacial?

    As discussed during our Q1 call, we are working very hard to better align HPs cost structure with its revenue profile.

    -We have a problem making money, and we cant seem to figure out what people want that will get us the money we want, so we better cut costs. I've got a list and can assure you that reduced CEO compensation comes in at a hard position #297.

    Were streamlining and removing complexity at every turn, and in the process, were creating the capacity to invest in innovation and quality.

    - Shoot, just who let all this complexity in the door? Front desk people have been terminated or reassigned. Did you see those nice words I used. Creating, good, Capacity, good, Invest, good, Innovation and Quality, real good. In fact, I just won MBA Bingo. What's that? The capacity to invest is not the same as investing? What's that? What were we investing in before, if not innovation and quality? Good questions. Our consultants tell us that because our capacity to invest was not big enough, the investments were always bumping their heads, having an ouchie, and next thing you know, our lobbies and break rooms were filled with complexity while innovation and quality had to take many, many sick days. First thing I did as CEO, I said "Hey, we have to stop investing in the bad things and start investing in the good things." It was huzzahs and drinks all around and person after person saying "Leo? Who?"

    And over time, were of course thinking about how we can drop some of our savings to the bottom line.

    - Translation unavailable. What? I'm no CPA, but it seems to me if you reduce spending while maintaining the same revenues, it's there on the bottom line already, without requirement of a willful act of loosening a grasp from a height.

    Though not adequately represented in the quote, haven't they been saying this week that the 27,000 in layoffs would result in savings that could be plowed into r&d. Isn't the money spent on r&d actually the money spent on people doing r&d? Is 27,000 a net number, or are they talking about the layoffs and not the hires. If the savings realized are recommitted, isn't it a net wash? HP used to be innovative, when did they push the Innovate Less Then We Need button? And when it was, was that to reduce costs and increase "shareholder value?" How much money does innovation cost? Why was it thought that they were fine spending less than that until this quarter's results opened their eyes on their innovation deficit?

    As to journalists who highlight the "beating analysts' expectation." Yeah, so they're heading into a wall at 40 MPH instead of 80 MPH. There's that.
    • Have to hand it to you, Sir.

      That is the most detailed explanation of the issue I have ever heard. Of course, you are spot on. I wonder why you would waste your time on sdnet but I am thankful you had the time. Still HP is a buy at this point is it not? It's not as if the company will implode next year. They do have some momentum do they not? Printers are still needed. PCs are still needed. They could simply be satisfied with that.
  • The problem is the PSG group....

    Revenues from PSG are going to keep falling and Windows 8 will not help. Unfortunately, focus on that division is affecting the performance of the services division as well. HP needs to pull an IBM if they want to get out of this.

    • BCS is the problem

      As much attention as PSG gets, because it is really large in terms of revenue, they don't make any money (profit) in that game. $2 billion and some change on $40 billion in revenues. BCS (big Unix servers and similar OSs) are dead in the water with the end of Itanium, the chip they all use. BCS is nothing in revenues, $5-6 billion, but it makes more profit than PSG, something like $2.5 billion. All of that is in free fall. The real problem is that BCS is the anchor for HP in data centers. A bunch of people buy largely undifferentiated x86 servers from HP purely because they already buy the big Unix boxes from HP, likewise with storage and networking. BCS also drags a bunch of software and services. When you add up not only the losses in BCS alone, but all of the related purchases it is a huge problem.
  • Just another example of management blather and denial

    She recycles all the cliches and pat phrases that many other executives without a real clue have used, equally unsuccessfully. The concept of pouring re-allocated monies into some nebulous R&D effort is just another obfuscation of the fact that they stopped thinking a long time ago. The net of it is just another pile of baloney, malarkey, and wishful thinking, signifying nothing.
  • It will all come down to HP releasing fresh product

    Hurd was kryptonite to the company in the way the prostitute-shenanigans in Colombia were to the US Secret Service. His replacement Apotheker seemed more interested in choosing the color of the leather seats for the corporate jet than actually innovating.
    I'm sure there's a lot of criticism of her simply due to the rather rabidly sexist male-dominated world of IT. Whitman is no Carly Fiorina.
  • The end results always the same

    You can restructure all you want. But if your end result is more of the same what have you accomplished? All I have seen HP do is replace CEO's and lay off some people. You hear things like selling off the PC unit or creating a separate unit. But none of it happens. I think all these PC companies need to realize that computers are not advancing as fast as they were say 10 years ago. You keep hearing how fast they are getting, but the clock speeds are the same. People sending email, doing documents and other office tasks will never increase productivity because of it. Intel can brag all it wants but for most PC users your not going to notice.
  • Blaming business leaders for technological and economic changes is easier!

    Meg Whitman is again at the wrong place at the wrong time. She will not change the course of HP.

    A large part of the American tech economy will hit the roadbock in the next few years because of two things:
    #1 Moore's law is no longer valid. Gordon Moore predicted a 2 year timeframe for transistor count to double. It is no longer valid as the new timeframe is 3 years or more. So HP will sell lesser # of PCs and printers and servers as a whole.
    #2 Software computing needs are met in more ways than one. The PC replaced the minicomputer terminal in a new client-server system tech cycle beginning in the 80s and dragging on till middle of 00s. The PC is now not needed for every computing task. And so is not the proprietary server. Unix servers are a stabilized market and PCs are a stabilized market too. HP's problem is Windows has no presence in the mobile market yet. And it made wrong bets on Palm. Add to it the changes to the way the Services industry operates amid stiff competition from IBM, Accenture etc. So EDS does not help either. HP should move to Cloud fast and into commodity Linux servers. But it is very slow to move.

    It appears HP will decline in a slow and steady manner in revenue and profits.
    • Virtualiztion, Cloud, paperles, BYOD, shrinking government spending

      everything is poised to slow growth for HP and other companies. But it intern make their business clients run more efficiently and cost effective.