HP's third quarter results show PC, printer, server, and services revenues in decline, but Meg Whitman sees silver linings in the otherwise dark cloud.
Hewlett-Packard on Wednesday reported its third-quarter financials for the period ending July 31, and the results weren't pretty. The company posted lower revenue on nearly all fronts: PCs, printers, enterprise servers, and services. It also posted a company-record write off of $10.8 billion against earnings and it cut its full-year performance forecast to the low end of its original guidance for fiscal year 2012.
Seeing no quick fixes, HP CEO Meg Whitman has prescribed a long list of methodical remedies designed to return the company to profitability and growth. During a conference call with equity analysts late Wednesday, Whitman reviewed progress on what she repeatedly described as a multi-year turnaround. The question is whether Wall Street and HP's board will be patient enough to give Whitman the time her strategy demands.
The good news, if you can call it that, is that the "trajectory of the [fiscal] declines have flattened," as Whitman put it, with quarterly earnings of $1 per share, surpassing earlier company estimates of 97 cents. That was despite lower-than-expected revenue of $29.7 billion, down 10% from the year-earlier quarter and shy of the $30.1 billion originally anticipated. There were also a few bright spots in the company's performance, including successes in storage and networking, and progress in expanding sales of hyperscale servers and high-end printers.
Whitman detailed three broad challenges facing HP: Macroeconomic trends, like weakness in the global economy and in Western Europe and China in particular; industry trends, like the rise of tablets, cloud computing, and virtualization; and a long list of things that Whitman said HP should be doing better.
On this last front, Whitman's refrain was that the remedies will all take time. After less than one year in the top spot at HP, Whitman hasn't had much time to change the way HP works. And despite calls by some for more drastic action--like selling off the PC or printer businesses--Whitman is sticking with her "better together" strategy that foresees no major divestitures.
HP is facing pricing pressure across all its businesses, which is why it announced a massive restructuring program in May to get the company's cost structure in line with competitors like Dell and Lenovo. During the next two years, HP plans to cut 8% of its workforce, or about 27,000 jobs.
HP reported on Wednesday that some 4,000 employees had already taken advantage of an early retirement plan, but most of the savings won't be realized until next quarter. More employees than expected are taking advantage of the early retirement plan, HP reported, such that 11,500 will leave the company this year instead of the 9,000 anticipated. That will certainly help improve the cost structure, but it's also a sign of low morale within HP.
Tablets, Windows 8 Affect PC Sales
Nowhere were HP's results poorer than in its Personal Systems Group (PSG) PC business. Echoing reports by Dell, which announced steep revenue declines on Tuesday, HP said sales of PCs are stalled due to growing sales of tablets (read, Apple's iPad) and the impending release of the Windows 8 operating system, which has many customers deferring purchases. PSG revenue for the third quarter was down 10% from the year-earlier period to $8.6 billion. Desktop units were down 6% while notebook unit sales dropped 12%, the latter being a sign of the inroads tablets are making as the preferred mobile device.
The fix for these PC woes depends on demand for Microsoft Windows 8 and the success of expected HP tablets based on that new operating system. HP has already discussed plans for an HP Business Tablet based on Windows 8, but Whitman revealed on Wednesday that the company will also introduce two consumer laptop-tablet hybrids. Windows 8 won't be released until late October, the end of HP's 2012 fiscal year, so don't look for a PSG rebound in fiscal 2012.
HP's Imaging and Printing Group (IPG) reported a 3% decline in revenue over the year-earlier period to $6.0 billion. Offsetting weak sales and bloated inventories in the consumer segment, which saw a 23% decline in unit sales, Whitman said IPG is succeeding in selling more profitable high-end printers.
Whitman is counting on integration of the PSG and IPG businesses--a plan she hatched--to reduce overlaps and drive cost reductions. That move is well underway, she said, with the combined scale of the two units expected to yield freight, logistics, and supply chain efficiencies. Here, too, it may be months or even quarters before the benefits are realized. In the long term it might also make both businesses easier to spin out, but there was not talk of that.
HP's Enterprise Servers, Storage and Networking (ESSN) unit reported a 4% year-over-year decline for the third quarter, but Whitman highlighted bright spots, including a 60% increase in 3Par storage sales, new releases of HP StoreOnce backup products and Virtual Application Network technology, and a 6% increase in networking revenue.
Getting HP's cost structure down is the answer to competing profitably in commodity server markets such the X86 business. But the key to profitable growth is quickly ramping areas where HP is innovating, such as the fledgling hyperscale server business launched last year with Project Moonshot. These ultra-low-power, mobile-chip-based servers currently represent a tiny fraction of HP's ESSN sales, but Whitman said HP is aligning its supply chain and engineering groups to ramp up production.
Where Heads Have Rolled
HP's Enterprise Services business, built largely out of the $13.9 billion acquisition of Electronic Data Systems in 2008, was the subject of HP's massive $8 billion write off announced on August 8. That unit's transition from low-margin outsourcing to higher-margin systems integration and consulting work was not happening fast enough, Whitman said, so she replaced the head of that division.
Software is another area where heads have rolled. Revenue in software was actually up 18%, thanks in part to HP's extravagant, $10.3 billion purchase of Autonomy last year--one of former HP CEO Leo Apotheker's last acts before being fired. Autonomy CEO Mike Lynch and his management team have since been replaced by HP executives, and HP CFO Cathy Lesjak revealed on Wednesday that unified reporting capabilities and consistent sales practices have been put across that unit to gain reliable sales forecasting. Those are the sorts of fundamentals you would have expected to be in place at a company that was on track for $1 billion in sales before the acquisition. Lesjak also held out the possibility of additional write offs in the fourth quarter, hinting that HP's software unit (and undoubtedly Autonomy's inflated book value) is under scrutiny.
It's refreshing, at least, that Whitman is not partial to the happy talk that marked Apotheker's short tenure at HP. To the contrary, she remains an HP critic. "HP had some very serious challenges when I first got here," she said. "We've made progress on many things, but there are still some serious execution issues in this business."
That's a message that there are still things she can do to fix HP. Whitman also emphasized that HP is now delivering on what it is promising to do. Only time will tell if the promises will be enough.
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