HP has to look beyond cost cuts soon
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. —