HP has to look beyond cost cuts soon

August 20, 2009

EricAuchard.jpg– Eric Auchard is a Reuters columnist. The opinions expressed are his own —

The stock price seems to be the only thing growing at Hewlett-Packard, the world’s largest computer company. HP shares have risen 75 percent this year, despite few signs of a revival in technology spending.

The company, best known as a supplier of computer printers, has suffered a 19 percent drop in sales of hardware and ink supplies. In good times, this produced the bulk of HP’s profits, but it’s the financial engineering under Mark Hurd, the company’s chairman and chief executive, that seems to be the main driver now.

So far, he has cut 16,000 of the planned 25,000 redundancies. It has taken roughly $3 billion in restructuring charges. This has masked underlying sales and profit weakness in its personal and corporate computer divisions.

Excluding the impact of the acquisition of computer services company EDS nearly a year ago, the company’s remaining businesses declined nearly 20 percent during the fiscal third quarter ending in July.

Hurd remains vague about when the recession may hit bottom.

“We’re encouraged by the stability that we’re beginning to see in the market but not yet at a point that we’re ready to call it a turn,” Hurd told investors on a conference call following HP’s quarterly report.

The benefits from cost-crunching at EDS have kept the company muddling along through 2009. HP reported total revenue for its third quarter ended in July fell 2 percent worldwide, but grew 4 percent, excluding currency effects.

Investors, which have returned HP’s stock to $44 — near pre-financial crisis levels — are now counting on a 2010 rebound to support the stock.

Hurd says U.S. businesses appear to be spending again on new projects and upgrades of aging computer infrastructure. But Europe has yet to show improvement.

Europe, which accounts for nearly 40 percent of the Silicon Valley-based company’s global revenues, declined 12 percent in the latest quarter, hurt by the weaker dollar over the past year. This was partly offset by 8 percent growth in the Americas and strength in China.

“The U.S. is beginning to do refresh work and you’re seeing that show up in the numbers. Things are still not as robust in Europe,” Hurd said.

The company is deferring questions about its longer-term outlook until September, when it holds its annual analyst meeting. Outside of a strong cyclical rebound, HP needs to answer how it plans to grow after it finishes with cost cutting at EDS.

The danger next year could come from any success it shows in signing new, long-term contracts at EDS. That’s because upfront investments needed during the first year of big consulting deals can be steep, with payback only coming later in the life of what are typically five-year contracts.

Half of HP revenues now come from maturing businesses like printers and PCs. No cyclical rebound in these businesses can disguise the need for the company to reinvent itself in new growth markets. Restructuring magic tricks can’t support the stock much further.


– At the time of publication Eric Auchard did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. —

2 comments

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If you’re right, Eric, and HP were “best known as a supplier of computer printers” then one might expect HP to strive to become the best supplier of computer printers there possibly could be. Sooner or later, they’d have to at least give this some consideration…

This would entail reducing or eliminating the prodigious back-end cost and environmental wastage for which computer printers are still lamentably renowned, and doing this across the entire printer product line: in other words, taking a decisively green policy stance in delivering performance with a conscience.

If anybody can find a way to make computer printers less wasteful and still make money selling them, HP can.

But why stop there? HP is also known – to many customers – as a maker of pretty good and well-supported computers in general, albeit with silly antiquated names like “Pavilion” and then a dizzying array of alphanumeric suffixes seemingly designed to confuse potential buyers before they commit to purchase; also far too closely embedded with Windows OS at a time in history when MS-OS has utterly exhausted its credibility, internationally if not domestically.

The design factor in HP’s line of workstations and (hey, neither bad nor too expensive, either) LCD monitors is unfortunately behind the times, lacking design vision and that elusive aura of lasting quality one yearns for in ostensibly durable goods. Not that they’re bad products, but they just don’t look particularly good or consistent.

So the look, nomenclature, perception of value and eco-awareness across its entry-level and stand-alone product lines might be things HP could work on and come out ahead of where they are now.

HP might also better clarify and incentivize the channels through which people can actually become HP customers, now and in the future. HP’s interface to new-user situation is still far from optimal at this point in time, their dealer network vastly underdeveloped. On HP’s muddling website, it may be best to refrain from further comment.

As far as legacy customer growth and retention is concerned: HP’s integrated enterprise storage and system implementation support is really good, valuable even; but again, by no means yet as free – as any computer technology provider needs to be – of the dreaded Microsoft curse, because good, intelligent enterprise these days no longer bows to that particular monolith, nor do increasingly educated entry-level users.

At present, HP’s hardware is more reliable and scalable than the clunky operating system to which it is primarily committed.

HP should come emerge from its present cycle of relative passivity, flying solid colors and shaking loose from a recently chequered history if it desires to find the necessary clarity of vision by which to navigate, identify and occupy a market position worth defending in the long run.

Posted by The Bell | Report as abusive

For a company who’s motto is ‘Invent” I don’t see any Inventions going on worthy of note, only acquisitions. HPQ and Mark Herd are just a HERD of sheep quietly being led off the cliff they have created themselves. “INVENT” NOT !!! Heck, I have an invention for them that would sell at least a $$$Billion… Yet they do not let Outside Inventions in because their R&D didn’t think it up first ??? HP and Mark Please Note, Sometimes you have to think OUTSIDE your box and Let Inventions in from the outside. The problem with current R&D departments is they are a closed loop Old Boys and Girls Club. Yes it is possible those of us toiling out here in our GARAGES ( where HP began) do have INVENTions worthy of note.

Posted by Wilson | Report as abusive