Can HP finally say 'Carly who'?

With stellar fourth-quarter results and expected growth next year, HP looks set to move past its troubled history.
Written by Eileen Yu, Senior Contributing Editor

NEW YORK--The going has been tough for Hewlett-Packard, which struggled to improve performance after its high-profile leader Carly Fiorina stepped down in February this year. But the outlook is bright for the computer giant which appears to be on the road to recovery.

Speaking at Tuesday's securities analyst conference in New York, HP CEO Mark Hurd acknowledged the company had major issues which had to be resolved when he began his tenure in March 2005.

"I'll tell you that not everything was good," he said, adding that at the same time, things "weren't all bad".

Hurd shared that after rounds of discussion with HP's customers and investors, he determined the IT giant had loads of innovative cutting-edge technologies, a strong brand, and customer loyalty. However, the company was also tough to do business with, slow to go-to-market, and was dragged down by a complicated sales model.

Operation-wise, Hurd said he found HP "very complicated" where only 30 percent of its cost and expenses were under its control. "That's too low," he said.

But the IT vendor has been making positive growth, with stellar results in its fourth fiscal quarter 2005, ended Oct. 31, he said.

HP expects its revenues to grow between US$89.5 billion and US$91 billion in fiscal 2006, from US$86.7 billion this year.

"We have a lot of stuff to go work on," he said. "We don't think [fourth quarter] was an ultimate victory. We are continuing to work hard. But I believe that HP is aligned with trends in the market. We have strong assets that we can leverage in our core businesses, and there are opportunities in adjacent markets we can leverage."

According to Martin Gilliland, a research director at Gartner, HP has registered "pretty good" growth numbers worldwide and in the Asia-Pacific region.

The vendor has been growing across most of its business units including its printer, server and PC groups, he told ZDNet Asia.

Gilliland noted that HP grew its PC market share from 4.8 percent to 6.8 percent in China, and from 14.1 percent to 17.1 percent in India.

"The market volumes are good and the sentiments are good," he said. "They've started to design solutions and products that suit the local [Asian] markets, and they're doing particularly well in Asia where they've been driving their Made-in-Asia-for-Asia strategy."

However, Gilliland noted that profits from HP's services business fell to US$322 million in its fourth quarter 2005, from US$375 million in the same period last year. This dip, he added, was unexpected since the company's server business did well.

"One of the markets they've been able to turn around really well is their server group," he said. "From a loss 18 to 20 months ago, it made a US$405 million profit in the fourth quarter 2005."

"But with server sales, you would typically be able to sell more server-based services such as helpdesk and onsite support, which is where HP plays well," he explained. "So having grown the server business, you would expect them to grow their services as well but that didn't seem to happen."

HP has not packed its software group with many product offerings, and "that's costing them money", Gilliland said.

HP's software business only turned profitable in the fourth quarter of 2005. However, Ann Livermore, HP's executive vice president of technology solutions group, explained that the company has consciously chosen a "more focused" software strategy. It has confined its software investments to a handful of key areas, specifically management, virtualization and identity management security tools, she said.

Livermore also noted that HP had committed to be profitable in its software business in the fourth quarter 2005, which it achieved at a 8.7 percent operating profit.

"Before that, what we were really doing was working through the mergers and acquisitions investment we made," she explained. "We made nine software acquisitions over the last couple of years. They were all small companies, with big research and development investment but almost no revenue stream."

"And so as a result of that, we had very significant operating expense that we had taken on because we chose to do that to bring in the functionalities," she said. "You'll see us continue to focus on revenue growth…we feel good about our business model as we go forward."

Gilliland said HP will have to focus on making its operations more efficient to stay competitive in 2006.

"Operational excellence, it's that simple…making sure they do what they do better than anyone else," he said. "It's not so much about coming out with new things, but doing them better. That's what Hurd wants, and I think is what HP needs."

"Most of their [business] divisions are in very competitive markets…if you miss something in your operations, that will screw you up for the whole year and for that whole product. So they risk a chance of slipping up everywhere."

Gilliland added that Hurd has been open about his desire not to make any strategic changes in the company, preferring to focus on "executing" its existing strategy.

"He came in and said he's not a strategy man; he's an execution man," Gilliland said. "Assuming they can achieve more efficiencies while growing their sales, then the future is pretty bright."

So has the company moved past its troubled history when Fiorina was at the helm? Gilliland believes so.

"People don't even talk about Carly anymore, so yes, I think they've gone past it," he said. "But to be fair to Carly, she created a new direction for the company, built the innovation model back into the company, had people happy to be working for HP again, and the media happy to talk about HP again.

"So she did what she was brought in to do. But she just didn't bring in the profits, and that's why they had to move her," Gilliland added.

ZDNet Asia's Eileen Yu reported from New York, USA.

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