HP: Meg Whitman's tough talk is a good start

Her blunt assessment of HP's woes stung investors, but at least she's facing the facts.

By InvestorPlace Feb 24, 2012 10:29AM
By Jonathan Berr,

Hewlett-Packard (HPQ) CEO Meg Whitman, who took over as head of the No. 1 PC maker after Leo Apotheker was moved out last year, is being penalized by investors for not mincing words about the enormous challenges that lie ahead for the iconic tech company. She has little choice because the company's results, released Thursday, were terrible.

Net income at the Palo Alto, Calif. company fell 44% to $1.5 billion, or 73 cents a share, down from $2.6 billion, or $1.17, a year earlier. Adjusted for one-time items, the profit was 93 cents, beating Wall Street's low expectations of 87 cents. Revenue fell 7% to $30 billion, missing analysts' forecasts of $30.7 billion. To her credit, Whitman, who rose to fame as the CEO of eBay (EBAY), gave a blunt assessment of HP's problem and pointed out that it will take years to fix them.

"We are not managing for short-term objectives," she said during Thursday's earnings conference call. "We are taking advantage of this opportunity to position HP for success, not for the next quarter, but for decades to come."

Comments like that don't depress investors' expectations, they pulverize them. So, it's not surprising that shares of HP, which have plunged more than 36% over the past year, closed 6.5% lower, at $27.05, on Thursday. In fact, it's all too predictable.

One of the big lies of the quarterly earnings dance between Wall Street and Corporate America is that struggling companies can rebound through the sheer force of a CEO will. The reality is far more complex. Having a cooperative economy, and some luck, also helps.

As Whitman noted, HP is paying the price for years of poor decisions. For instance, more than half of the company's revenue drop resulted from  the disruption in storage drive supplies caused by the floods in Thailand. This highlights a weakness in HP's supply chain. Attempts to divert resources to higher-margin products failed because of operational issues.

"We didn't make the investments we should have during the past few years to stay ahead of customer expectations and market trends," Whitman said. "As a result, we see eroding revenue and profits today. We need to invest now as a market leader from a position of strength."

Easier said than done. Most of HP's businesses struggled during the last quarter. The personal systems group, which includes PCs and notebooks, saw revenue decline 15% to $8.87 billion. The printing business posted revenue of $6.26 billion, down 7% year-over-year. Revenue in the enterprise servers, storage and networking division slumped 10% to $5.02 billion.

The bright spots were services, where revenue rose 1% to $8.63 billion, and software, where sales rose 30% to $946 million, thanks to the acquisition of Autonomy.

One of Whitman's first decisions as CEO was to reverse Apotheker's plan to sell HP's PC business. Determining whether she made the right decision will take a while.

But the company's future may depend more on tablets, and HP plans to release one that'll operate on Microsoft's (MSFT) upcoming Windows 8 operating system. HP canceled plans to release a tablet that would have run on the webOS operating system it acquired when it bought Palm.

The new tablet is key for Whitman. She's betting that businesses will buy the HP device because it will offer more security features than Apple's (AAPL) iPad. In theory, if a corporate client likes the HP tablet, it may be more inclined to buy HP's higher-margin products and services. The strategy makes sense. However, it also puts HP up against IBM (IBM), which has been hugely successful in this arena.

Whitman, though, has little choice but to try this risky approach even though the results may not be immediately apparent. Time, however, isn't on her side.

Find out what RIM, another once-glorious tech company, is doing with its tablet business as it tries to get back on its feet

Jonathan Berr does not own shares of any companies mentioned here.

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