HP needs an extreme makeover

By Fritz Nelson , written on August 22, 2013

From The News Desk

We’re in year two of what HP CEO Meg Whitman promised (threatened?) would be a five-year turnaround for the company whose value had been dramatically eroded by too many changes in leadership and strategy, the twilight of the modern-day personal computer, acquisitions gone wild, and enough drama for a reality TV series.

After yesterday’s executive shakeup and yet another quarterly earnings calamity, Whitman may be auditioning her company for “Extreme Makeover, The Corporate Edition.”

This morning, HP stock is trading down more than $3, or almost 13%.

There are many ways to summarize HP’s 2013 Q3 earnings, but try this one for size: Every HP business unit was down in revenue year over year, except software, a division that brought in $982 million, or approximately 3 percent of HP’s quarterly revenue. The software unit’s growth was a whopping 1 percent.

You’re forgiven if you didn’t even know HP had a software group, but with several decent security acquisitions, industry-leading IT management software, the analytics engine, Vertica, Autonomy and other new big data initiatives, software might be one of the most interesting parts of HP.

And that is the crux of HP’s monumental challenge: its mainstream businesses, like PCs and what HP calls Industry Standard Servers (ISS), which combined drove approximately one-third of HP’s quarterly revenue, are suffering, and will likely continue to shrivel as those markets contract.

Even Whitman noted that HP’s overall technology mix is weighted heavily to the company’s declining businesses, but at some point she expects HP’s more innovative and promising new developments to make up for those declines.

But HP’s Project Moonshot, its so-called hyperscale server, is just getting into the market, and actually saw a sequential decline, according to Whitman. HP’s converged storage offerings grew 37 percent, but the company’s overall storage business was down 10 percent. HP launched its cloud products less than a year ago, and those numbers have yet to appear in any specific growth statements, and now face newer competitors like VMware and Google, not just stalwarts like Amazon and Rackspace. Meanwhile HP’s networking business has been, for all intents and purposes, flat most of the past couple of quarters, and only makes up about 2 percent of HP’s business.

Whitman has continuously called out security and information management as key growth areas for HP’s future. Security saw double-digit growth, Whitman said, and Vertica saw triple-digit growth. Whitman told analysts to expect even more, and in cloud, in Q4. And yet that’s not nearly enough to break HP’s fall right now, especially when overall net revenue was down 8 percent for the quarter.

Whitman had to admit that HP will not be showing off the 2014 revenue turnaround she had hoped as recently as HP’s last earnings quarter in May.

Still this time Whitman’s effort to find a few silver linings was valiant -- HP’s market share dominance in networking in China, its PC share in India. (Quick, someone grab the data center numbers for Monaco!) But she was equally blunt about the performance of the company during her tenure, and about what HP needs to do to turn things around.

The culprits are almost too numerous to name, although Whitman wasn’t afraid to, saying HP’s challenges lie not with technology and strategic direction but with execution, namely around simplifying sales (or “sales motion” as she put it), cost structure, customer segmentation and operational efficiency in the supply chain and manufacturing.

Whitman called out the enterprise group in particular, noting that the server business was under tremendous pricing pressure (the group was down 9 percent). The “revenue share loss is bigger than we anticipated,” she said, adding that HP must move faster on hyperscale servers (represented by Project Moonshot, HP’s high density, low power servers). Whitman has previously said that Moonshot numbers should start to affect HP’s overall metrics in late 2014.

The overall server business is in steady decline. IDC numbers indicate that server revenues have fallen in five of the past six quarters, and mid-range and high-end server systems have experienced a disproportionate decline. Dell was the only manufacturer that saw revenue growth in the first part of 2013.

On HP’s networking business Whitman said: “We're the upstart in networking. Flat isn't good enough.”

Meanwhile, Dell’s enterprise business increased 10 percent in its most recent fiscal quarter, its fifth consecutive quarter of growth.

Not coincidentally, then, Whitman also announced that Dave Donatelli, once considered a viable candidate for the HP CEO job, is out as head of the enterprise group, replaced by Bill Veghte, who was HP’s COO. Donatelli will stay on in more of a business development capacity, “identifying early-stage technologies as he did successfully with 3Par and 3Com,” according to an HP press release, written perhaps by someone who may not realize that a company started in 1979 (3Com) isn’t exactly early stage.

The enterprise group, Whitman said, has a “misaligned go-to-market model,” and “fixing this will be Bill’s top priority.” Whitman reported a 4 percent drop in the enterprise business in Q2, and promised this would change. It didn’t, and now Donatelli is out.

With these moves, Whitman delivered a few key messages: when she isn’t happy with the progress, she’s not afraid to make difficult decisions; and HP is looking to make more acquisitions, though Whitman added that the company was “mindful of the event we just came off” (meaning the Autonomy debacle and subsequent write down), and that future deals would be “focused and disciplined.” But she admitted that acquisitions would have to be a part of HP’s growth strategy.

One analyst on the earnings call asked why Whitman seemed to favor internal candidates for HP’s “fresh thinking.” She acknowledged that was true, adding that it was often easier to bring in some of HP’s existing talent, which she argued was plentiful. And those executives, she said, already knew how HP worked.

That, of course, may be part of the problem.