HP Earnings Fall Short, Whitman Looks To Future

Meg Whitman's HP is focused more on the next decade than the next quarter, she says. And her HP has plenty of use for the personal systems business.
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Hewlett-Packard needs to "get out of the news cycle and reduce the drama," CEO Meg Whitman said during the company's fourth-quarter and fiscal-year-end earnings call Monday afternoon. Whitman, on the job for two months following the resignation of former chief Leo Apotheker, acknowledged that HP "didn't live up to our expectations," referring, most likely, to the company's soft financial performance for the year, but also the confusing twists of a potential PC business spinoff and musical CEO chairs. She promised to return the company to solid, fundamental business practices, focus more on R&D and less on acquisitions, and position HP for long-term health rather than short-term gains.

Whitman didn't mince too many words and seemed to take ownership of the company's recent blunders--including its indecision about its PC business, its plans to exit the mobile business, and the hefty price HP paid for content management software company Autonomy—even though she wasn’t at the helm when they took place. And in announcing that HP's fiscal 2011 net income fell 19% from a year ago, to $7.1 billion, on 1% higher revenue of $127.2 billion, Whitman also didn't promise a better 2012, admitting that investors will take their shots. HP, she said, is committed to the next decade more so than the next quarter.

HP spent $3.25 billion on R&D in fiscal 2011, and Whitman said it would spend about 10% more than that in 2012. When asked whether the company would produce greater returns on that R&D spending next year, she said: "It's not an ROI in year one or year two. It's 2014 or 2015. I wish I could tell you differently, but it wouldn't be true. It's a long-term play. We cut out a lot of muscle in R&D. We are building this company to be great over the next decade. We're making some long-term bets here."

The cynics may pary: Isn't that what CEOs say when the short-term picture looks bad?

The financial numbers weren't good. Looking at the fourth quarter, revenue for three of HP’s core businesses--personal systems, imaging and printers, enterprise servers, storage and networking--were down. HP executives cited flooding in Thailand (which has a big impact on the supply of hard disk drives), economic conditions globally (especially in Europe), and that self-inflicted "drama" among the problems the company will be fighting throughout fiscal 2012.

The good news: HP's Q4 software business grew 28% compared with the year-earlier quarter (licenses grew 33% and software services revenue grew 36%). HP’s storage business increased 4% (3Par, a virtualized storage systems business HP acquired in September, saw triple-digit growth). HP’s networking business grew 5% in the quarter. HP's outlook on software, storage and networking for 2012 is also strong, but the company didn’t provide growth estimates.

But HP’s server business, typically a strength but down 4% for x86 servers and 23% for high-end systems in the fourth quarter, has been hurt by Oracle's decision to turn away from developing its enterprise software for Itanium-based servers.

Reading between the lines, it sounds as if HP is still pursuing its litigation against Oracle at full throttle. Earlier this year, after Oracle proclaimed Itanium to be dead and announced it would no longer develop for the chip, HP filed suit against Oracle, claiming that the software giant wasn't living up to previous agreements.

Whitman said the company is placing a big bet on its Project Moonshot server, which she characterized as one of the greenest servers around, operating with "89% less energy, 94% less space, and 63% less cost" compared to conventional servers (those figures are based on HP's own internal lab testing). Those Moonshot servers, Whitman said, provide a great example of HP's R&D setting the industry pace.

HP’s $10.3 billion acquisition of Autonomy, completed in October, is already starting to pay dividends, Whitman said. Server pull-through (that is, Autonomy software bundles on HP gear) is one particular surprise, she said, and once the full force of HP’s global sales force gets behind Autonomy, those software sales should take off, she said.

Indeed, one of the tenets of HP's getting back to business basics is to stop operating as a collection of business silos and to start operating as one company, Whitman said. She said definitively that HP wouldn’t be making big acquisitions in 2012. Pressed for a definition of "big," she said most of them would fall below $500 million, though she wouldn't rule out something as big as $1 billion. Any companies it acquires will likely fuel HP's growing software business, she said.

But for the rest of the company, which was built on the premise of innovation, R&D will lead the way.

Whitman has been decisive since taking over from Apotheker, who was forced out after only 10 months as CEO. She overturned his decision to seek a spinoff of HP’s personal systems business, which the company doesn't expect to grow in 2012 but does expect to stabilize after posting 2.9% lower revenue in fiscal 2011. Many customers, especially in China, thought HP would be exiting the hardware business altogether, Whitman said. "There's no question HP and PSG are better together," she said emphatically.

In fact, there was plenty she said emphatically, but the numbers will speak for themselves.

Fritz Nelson is the editorial director for InformationWeek and the Executive Producer of TechWebTV. Fritz writes about startups and established companies alike, but likes to exploit multiple forms of media into his writing.

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