HP Cuts Forecast As Whitman Warns On Turnaround

Hewlett-Packard’s CEO Meg Whitman has revealed the scale of the problems facing the company at the moment.

Executives warned financial analysts at a meeting 2 October in San Francisco that HP’s deteriorating financial numbers will continue into 2013 as the company tries to recover from several years of executive upheaval and mismanagement.

Company Turnaround

Whitman, the former eBay CEO who is finishing her first year at the helm of HP, has for months been talking about turning around the giant tech vendor as being a multi-year project that will involve a restructuring of the company, aggressive expansion into high-growth markets and $3.5 billion (£1.2bn) in cost reductions that will include as many as 29,000 job cutsover the next couple of years.

Talking to analysts at a Webcast meeting, Whitman said the job will take as many as four to five years, and the plans being put in place this year and next won’t begin to heal HP’s bottom line until 2014. Until then, the company and its investors will continue to see revenue and profit wane in almost every business category, she said.

That was backed up by Chief Financial Officer Cathie Lesjak, who said the company expects profits in 2013 to be well below financial analyst expectations.

What the company needs is time and stability after a few years that have seen executive changes that are unusual for most companies, particularly as large and established as HP. When Whitman came aboard in September 2011, she became the company’s third CEO in less than a year, following the departure of Mark Hurd in 2010 and the ousting of his replacement, Leo Apotheker, after 11 months. HP’s financial numbers began falling in the fourth quarter of 2010, she said.

“My belief is that the single biggest challenge facing Hewlett-Packard has been changes in CEOs and executive leadership, which caused multiple inconsistent strategic choices and, frankly, some significant operational miscues,” Whitman said. “It’s going to take longer to right this ship than any of us would like.”

Analyst Surprise

Roger Kay, principal analyst at Endpoint Technologies Associates, said he was surprised to hear about the lowered expectations for next year, noting that she “keeps lowering expectations and asking for more time.” However, Kay agreed with her assessment of the problems brought on by the rapid CEO changes over the past couple of years, saying that when Whitman arrived as CEO, she inherited “kind of a mishmash on her plate.”

Whitman said the miscues of previous CEOs continue to hamper HP. She ticked off a few of them: Adding $1 billion (£621m) in cost to the sales team at a time when revenue was dropping; having far too many products (including 2,100 laser printers); too much executive turnover in many of the business units (EDS – now HP Services – had four different leadership teams in as many years); poor internal back-office software systems; decentralised marketing that hurt go-to-market efforts worldwide; a lack of investment in research and development; and a disconnect between compensation and accountability.

HP has begun to change much of that, from reducing the number of products it’s selling to more closely tying compensation to measurable performance to adopting WorkDay and Salesforce.com for its human resources and CRM operations. The company also is more aggressively pushing into certain growth areas, including cloud, hyperscale computing, big data and mobility.

However, even with such moves, it will take HP several years to get back on track, Whitman said, noting that 2012 was focused on stabilising the company after a tumultuous 2011 that saw Apotheker push his vision of the company as a software provider, including buying Autonomy, ditching HP’s webOS mobility efforts, and advocating selling or spinning off its PC business.

After that, “the number-one job facing me and our management team was stabilising the company,” she said.

Long Term Fix

Next year will be about fixing problems and rebuilding the businesses, all against a backdrop of heightened competition and a struggling global economy that includes a teetering Europe and a slowing Chinese economy. By 2014, the products put in place in 2013 and the reinvesting in R&D will begin to bear fruit, with revenue and profit both growing into 2015, she said.

At the same time, Whitman reiterated her belief that HP is a better company with all its various business units, again pushing back at suggestions by some industry analysts that HP should spin off its PC or printer businesses, or both. It comes at a time when the worldwide PC market is slowing as more consumers and business users turn to smartphones and tablets, and as other vendors – like Lenovo and Acer – grab market share by sacrificing profit margins. HP, the longtime global PC market leader, is expected to soon be passed by Lenovo.

Whitman argued that the breadth of HP’s technology portfolio is a key advantage – “scale is a plus” – and that while the company expands into new areas like cloud computing and networking, it still benefits from its traditional businesses.

She noted that evolution during her talk, pointing out that in 2002, printing accounted for 40 percent of the company’s revenue and 95 percent of its profit. By 2011, printing was 20 percent of revenue and 30 percent of profit, a reflection of the effort her predecessors made in expanding the company’s reach.

“[Ex-CEOs] Carly Fiorina and Mark Hurd assembled a very powerful set of businesses,” Whitman said.

Endpoint’s Kay said much of HP’s problems can be traced back to cuts in R&D, initially under Fiorina and then accelerated under Hurd. It was innovation that built the company, and getting that going again will be hard, he said.

“That was the engine that fuelled their business for years,” Kay said, adding that HP has been “living off the fumes of that for … seven or eight years.”

It’s unclear whether Whitman will get the time and patience she is asking for to turn around the company. Even as she spoke to analysts, the company’s stock price slid even lower, and some analysts have begun to speculate about her future with the company. However, Kay said there was legitimacy to her claim that unsettled executive leadership in recent years has hurt HP.

“It’s the wrong way to go to change CEOs again, for all the reasons that she said,” Kay said, adding that she appears to be a good manager. And righting HP’s ship is not an easy task for anyone. “If not her, then who?”

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Originally published on eWeek.