CEO Meg Whitman in her words is at the half-way mark of her restructuring plan for Hewlett-Packard (NYSE:HPQ) and if the stock price is any judge, she has made good progress. The stock is up 23% this year and has recovered over half of the decline that began in April 2010.
HP is the world number two PC-maker by sales after Lenovo (HK:0992). Four years ago the share price dropped alongside global PC sales as consumers switched to mobile computing. HP’s share price drop was aggravated by the perception of company mismanagement; most spectacularly with the takeover of top UK software company Autonomy.
HP has written down a combined $17bn on the Autonomy and EDS (NASDAQ:EDS) deals. The resulting legal issues may continue to be a headwind with HP now suing Autonomy’s CEO on allegations of fraud after itself paying out over $150m towards cases involving defrauding shareholders and bribing foreign officials.
Restructuring plans do very broadly split into two halves; the first is cost-cutting and the second is rebuilding. For HP, the cost-cutting has been severe; the company has cut debt excluding its finance division to zero and last quarter announced further job cuts to total as many as a whopping 50,000.
There is a trade-off, cutting too many costs will eat into the company’s potential for organic growth. It was former CEO Leo Apothekar who crashed HP by purchasing Autonomy but arguably the wheels were already coming off the wagon because former CEO Mark Hurd had cut R&D spending. The reduced investment into research and development eventually led to HP falling behind the curve in the ever evolving technology market.
Meg Whitman may not have learnt the R&D lesson; CapEx spending declined in the last quarter but notably stock buy-backs dramatically increased. If Meg Whitman is not planning to grow the company organically at the pace needed to fend off competition then it will need to be through acquisitions and partnerships.
HP’s recent track record of acquisitions is not fantastic by any stretch. Notwithstanding Autonomy, the company bought Palm three years after the release of the iPhone by which time Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOGL) /Samsung (LONDON:0593xq) had sewn up the smartphone market with a loyal following attached to their app stores.
International Business Machines (LONDON:IBMI) is another “old-tech” company that faces headwinds from changing technology. IBM has taken the “if you can’t beat ‘em join ‘em” route and has chosen to team up with Apple to produce enterprise-focused smartphone/tablet solutions.
If HP explored a similar avenue to IBM teaming up with Apple, it could combine its own scale with another company’s expertise to give new depth to some of its product lines without the costs and risks associated with M&A.
HP’s PC and Workstation division is its largest by revenue and last quarter HP outperformed the market when consumer PC sales declined 2% year-over-year but commercial sales grew 12%. This is probably not sustainable given commercial PC sales would have got a boost from the necessity to upgrade when Microsoft (NASDAQ:MSFT) stopped supporting Windows XP.
PC revenues are declining and it’s a global trend that HP cannot stop. The question is which markets can replace the PC as a revenue generator for HP?
Printers are HP’s third biggest division by revenue but it has been facing increased competition from new entrant Kodak as well as Canon (NYSE:CAJ), Epson, Samsung and a host of other specialist printer-makers. 3D printing is a growing area that some believe will dominate manufacturing someday but HP appear to be missing the ball again and companies such as Stratasys (NASDAQ:SSYS) and 3D systems are rapidly growing into large market incumbents.
In a sign of some innovative thinking, HP is teaming up with Gilt Group to produce a smart watch; its designer look will make it unlike most models on the market but including no touch screen is a risky tactic. Being different is what’s needed to be a leader but it’s hard to fancy HP’s chances in the smart watch space after Apple releases its “iWatch”.
Right now software makes up a paltry 4% of HP’s revenue but Whitman announced HP will invest $1bn into cloud computing. Some of this investment has come through with the introduction of HP Helion Virtual Private Cloud (VPC) Lean; a preconfigured package which is faster to deploy; making the prospect of moving into the cloud less cumbersome for businesses. Cloud services could be the biggest new revenue source for HP but competition is coming from all angles including International Business Machines (LONDON:IBMI), Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and numerous start-ups.
Last quarter revenues dropped 1% year-over-year to $27.3bn while earnings increased 1% to 88c per share. On August 20th HP is expected to report third quarter earnings of 88c per share on revenue of $26.98bn.
HP has done the cost-cutting which has had the near-term effect of boosting the bottom line but now it needs to start rebuilding for the longer term. Job cuts have reduced the R&D capability it might have once had but HP has plenty of cash on the balance sheet for potential acquisitions. HP will just need to be a lot more thoughtful about future deals to have any chance of competing with the world of “new tech”.
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