HP's challenge: Sticking with its Project Moonshot fueled R&D plan

HP CEO Meg Whitman says the company has a research and development plan and is sticking with it. That's good because if HP doesn't step up innovation starting with Project Moonshot it's toast.
Written by Larry Dignan, Contributor

Research and development has never been more critical to Hewlett-Packard. If HP Labs doesn't deliver for the company it will slowly wither away.

The importance of HP's research and development plans was everywhere on the company's first quarter earnings conference call. CEO Meg Whitman said that HP has a plan for R&D and has to stick with it. Historically, HP would spend on R&D and then pull back. During the Mark Hurd years, R&D spending fell dramatically and it wasn't because HP's revenue growth went vertical.

Why is R&D everything for HP? Because it has the following cross currents to navigate:

  • The PC business is in decline and HP expects no improvement in fiscal 2013. That Windows 8 pop just didn't happen.
  • HP's cash cow printing business isn't going to grow. The printing business is a mature one that will be milked for cash flow.
  • HP's high-end servers---Itanium notably---are still struggling. Companies like Facebook and Google already roll their own servers. 
  • Cloud computing ultimately means HP will sell less hardware.
  • And the company is redefining services.

In other words, HP needs new tricks in a hurry if it's going to grow. Whitman's big hope is that Project Moonshot will change the server game for HP and give the company a shot of innovation credibility. Project Moonshot, basically an ARM server designed for hyperscale cloud providers, is giving HP a lot of confidence. Whitman also added that HP is taking its first orders for Project Moonshot servers, which will be sold in the current quarter.  She said:

We're just taking our first orders now for first phase of Moonshot. We're excited about it because of the characteristics of that technology. You might not be surprised to know that our first Moonshot order came from Japan. And the reason, of course is that they lost a big chunk of their grid in the tsunami, and so space, energy savings, and compute value at cost levels that are unprecedented.

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To say HP has high hopes for Moonshot is an understatement.

Here's Whitman on Project Moonshot and HP Labs:

Overall, our turnaround made progress in the first quarter. If I had to characterize it is I'd say the patient showed some improvement and there are a number of new programs and disruptive innovations that should help us along. Two that I'm particularly excited about are the refocusing of HP Labs under Martin Fink and the launch of our first product resulting from Project Moonshot. You will recall that during our security analyst meeting I talked about the need to improve how HP commercializes the incredible innovation that is happening across the Company. Today we are rolling out a new vision for HP Labs that is going to take one of Silicon Valley's most iconic entities to new levels. Martin and the leadership team are refocusing Labs to place greater resources on priorities more closely aligned with the business groups future product road maps, particularly in the areas of cloud, security and information optimization.

Innovation is the heart of this Company and we expect this refocused HP Labs to bring revolutionary new products to market that will change the way we manage, move and interact with information and how we understand the world around us. Later in the second quarter, we will be bringing the latest innovation from HP Labs and our Enterprise group to market, the first, commercialized product from our Project Moonshot. We expect this to truly revolutionize the economics of the data center with an entirely new category of server that consumes up to 89% less energy, 94% less space and 63% less costs than our traditional x86 server environment. This is exactly the technological inflection that can fuel the exponential growth of hyperscale computing. To put in that perspective, if just 10 large web services providers switched their traditional x86 servers to Moonshot, they could save a combined $120 million in energy operating expense and nearly one million metric tons of CO2 per year. The equivalent of taking over 180,000 cars off the road for a year. That is a game changer.

HP is hoping Project Moonshot becomes an innovation hit.

For HP, the innovation spiel is promising. Here's my mental roadblock with HP's R&D talk: I can't help but look at the research and development spending as a percentage of revenue. In its annual report, HP said "expenditures for research and development were $3.4 billion in fiscal 2012, $3.3 billion in fiscal 2011 and $3.0 billion in fiscal 2010."

That R&D spending sounds like a lot of money, but as a percentage of revenue HP spent 2.8 percent of sales on R&D in fiscal 2012, 2.6 percent in 2011 and 2.3 percent in 2010. It's worth noting that HP's revenue fell in 2012 so that boosted spending as percentage of revenue. IBM, HP's largest rival, spends roughly 6 percent of revenue on R&D hell or high water.

In fiscal 2001, HP spent 5.9 percent of revenue on R&D. In fiscal 2000 and 1999, HP spent at least 5.4 percent of revenue on R&D.

Whitman knows that HP can't get on the R&D bandwagon and then fall off repeatedly. She said:

We've got a plan for R&D. One of the things we have to stop doing at HP is increasing R&D and then pulling it back. Increasing R&D, and pulling it back. So we've got an R&D plan, we're sticking to it.

Whitman is absolutely right. Here's the bi-polar nature of HP's research and development spending by the numbers:

  • 2012: $3.4 billion, or 2.8 percent of sales
  • 2011: $3.3 billion, or 2.6 percent of sales
  • 2010: $3 billion, or 2.3 percent of sales
  • 2009: $2.82 billion, or 2.4 percent of sales
  • 2008: $3.54 billion, or 2.7 percent of sales
  • 2007:  $3.61 billion, or 3.4 percent of sales
  • 2006: $3.59 billion, or 3.9 percent of sales
  • 2005: $3.49 billion, or 4 percent of sales (Mark Hurd became CEO March 29, 2005).
  • 2004: $3.56 billion, or 4.5 percent of sales
  • 2003: $3.68 billion, or 5 percent of sales
  • 2002: $3.31 billion, or 5.9 percent of sales
  • 2001: $2.72 billion, or 6 percent of sales
  • 2000: $2.63 billion, or 5.4 percent of sales

The thing to watch is whether Whitman's R&D plan ultimately includes more money. For now, HP is a bit hamstrung. The company needs to rebuild its balance sheet and fix its business before it has the luxury to drop a few more billion of dollars on innovation.

On the bright side, Whitman gets that HP needs an innovation plan and then stick with it. After all, HP's innovation has to work or the company is going to be stuck in a commoditized technology vice it won't be able to escape.

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