Today during its earnings call, a sober HP discussed recent progress in executing its five-year turnaround plan that remains in its early stages.
HP had a difficult quarter that merely managed to meet expectations. The company failed to demonstrate that its recovery efforts are proceeding more quickly than anticipated. It’s a fix and rebuild year, the company stated, with some business units that are doing well, some that are essentially flat, and others that “haven’t yet turned the corner.”
There are a number of fronts HP is working on, including stemming revenue declines, protecting margins, and improving its balance sheet. And there is a balance between the goals: HP is exceptionally cost focused at the moment, making it hard to balance margin performance with revenue growth. The two can often be in contention.
So, in a bid to avoid non-market margin pressure that sharper revenue growth expectations might demand, the company is instead taking a more measured pace. At once it is striving to clean up its bank statement — having net debt at all is something most other tech giants do not have — and reform its company for the next generations of technology hardware, software and services.
With over 300,000 employees, often cribbed from acquisitions that CEO Meg Whitman noted were not always completely integrated, it’s a complex challenge. There are two anecdotes that came up during the call that are indicative of HP’s current market position: It’s PC OEM business, and its storage business.
In its “Personal Systems” division, HP noted that shipments declined an aggregate 8 percent, year over year. Driving that unit decline, consumer PC revenue fell 22 percent, while commercial PC sales fell a more modest 3 percent. All told, the PC business for HP generated only 9 percent of its profit, despite being its single-largest business unit.
Here we see a business that generates more than $25 billion in yearly revenue for HP stuck between market trends, a difficult economy, and regional weakness, according to the company. Much of HP is in a similar spot. The company, however, isn’t all obsolescence.
During the question-and-answer segment of the call, HP detailed how it sees itself driving revenue growth in the future. Currently, its “converged storage” business is growing, while its traditional storage sales are not. Eventually, the converged storage product becomes bigger than the traditional storage product, and the “company begins to grow.” Whitman went on to state, again, that HP must “keep an eye on costs.”
This is a decent perspective for HP, a company that has huge revenue lines that are either in slow decline, or under intense market pressure. Given the scale of the firm – more than $100 billion in yearly revenue – that it is under that sort of duress might seem odd, but it’s the given explanation. As Jon Fort of CNBC tweeted, “$HPQ margins getting squeezed in PCs, servers, & revenue short in enterprise. Shouldn’t be happening to a scale player this way.” HP has a long way to go yet.
To get there, the company explained the instructions it gives to its newly shaken up management structure: Set fair goals, deliver, keep an eye on the future, do “perfect” market segmentation and product pairing to that striation and, finally, manage costs.
So HP will control costs while old businesses slowly fade, until newer, quicker-growing incomes can take their place, relieving some of its margin pressure. This is something akin to a long tightrope walk on a windy day while younger, more nimble competitors lob rocks at you. Still, Whitman was a pillar of confidence on the call, despite being slightly obfuscatory via an overuse of jargon.
Investing in HP is now essentially a bet that Whitman’s war plan is better than the market pressures the company faces. Investors dinged the firm to the tune of 7 percent of its market cap in after-hours trading.
Top Image Credit: Don DeBold
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