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Testing Times For Hewlett Packard « Back
Selina Harrison, October 2012
In a particularly testing time for Hewlett Packard (HP), the tech giant reported a loss of $8.85bn (£5.5bn) for the three months to the end of July. Slowing PC sales were compounded by a huge write-down on the value of its services business, Electronic Data Systems (EDS), which it purchased in 2008 for $14bn.

Following years of poor leadership, last September the HP board appointed Meg Whitman as president and chief executive officer (CEO) of the company to help turn around its fortunes. Having previously worked for DreamWorks, Procter & Gamble, and eBay, where she steered the company during its massive expansion from 30 to 15,000 employees and $8bn in annual revenues, Ms Whitman is a seasoned leader. However, in a world where HP’s historical dominance in personal computers and printers matters less, Ms Whitman is trying to transform the businesses and increase its presence in the smartphone, software and big data centre arenas. But following announcement of the losses, in an interview with the New York Times she admitted “This is a big ship to turn.

I feel pressure every day.”

Ms Whitman has been quoted regularly in the press as stating that “HP is still in the early stages of a multi-year turnaround”, and whilst HP’s losses illustrate the harsh realities of creating growth amid long-term decline, the company has had a “decent quarter” overall.

The acquisition of EDS was meant to be HP’s arrival as a big services player, but it failed to yield the growth that the firm had hoped for and critics argue the company overpaid for the acquisition. As well as the $4.49 a share loss in the third quarter, HP reported that net revenue was down 5 percent to $29.7bn, slightly below the average Wall Street estimate of $30.1bn. In the same quarter last year, the company reported net income of $1.9bn, or 93 cents a share, on revenue of $31.2bn. Meanwhile, following the announcement of the cull of 27,000 employees, the company was hit with a charge of more than $1bn to cover layoffs. Without those restructuring costs in the quarter, HP would have had net income of $2bn, or $1 a share, slightly above the market’s expectation of 98 cents per share.

Even so, a look at various HP divisions shows that losses were widespread. HP’s PC division – or Personal Systems Group (PSG) – which forms around 30 percent of the company’s revenue, saw a 10 percent year on year fall in sales to $8.6bn. Desktop units were down 6 percent while notebook unit sales dropped 12 percent, the latter being a sign of the increasing popularity of mobile devices. Commercial revenue generated by PC sales decreased 9 percent, whilst consumer revenue declined 12 percent, and total unit sales were down 10 percent, the company said. HP’s Image and Printing Group (IPG) – the printer division – also suffered and saw a 3 percent year on year fall in revenue to $6bn. Although commercial hardware revenue was up 4 percent, that was offset by a 13 percent drop in consumer hardware and a 23 percent fall in consumer shipments.

Although down from the lows of previous quarters, Ms Whitman has managed to rebuild HP’s balance sheet – the company currently has $9.9bn in cash, up on the previous two quarters but down from a year ago – however she has forecast dim near-term prospects for PCs and printers, which were once HP’s most important cash-generating businesses. In the current climate HP is not the only tech giant impacted by this trend; shortly after the release of HP’s third quarter figures, Dell, one of HP’s largest competitors in the computer market, reported an 18 percent drop in net income from a year ago, largely because of weak PC sales.

The combination of the surge in tablet sales and the imminent launch of Windows 8 means consumers and businesses are not buying PCs in significant numbers. The general decline in PC sales has been plaguing HP for some time. Last August, as part of HP’s wider strategy to transform itself from hardware to software and systems maker, Ms Whitman’s predecessor, Léo Apotheker, said he may divest the company’s PC business. The news was met with disdain from employees and customers alike, and although he later reversed the decision, he was eventually replaced by Ms Whitman.

The decision to sell HP’s PC business was not the only decision which led to the denouncement of Mr Apotheker. Prior to this plan, Mr Apotheker also decided to end HP’s activities in the smart technology sphere – a decision which has also been reversed. However, after embarking on the near $1bn purchase of Palm in July 2010, almost a year later HP launched its Touchpad, a planned competitor to Apple’s iPad. The product was released to a muted response and, just 49 days later, Mr Apotheker announced the company was scrapping the gadget and immediately discounted it to $99.

Prior to his departure, Mr Apotheker, firmly fixated on committing HP to the software sector, led the acquisition of analytical software firm Autonomy Corp. HP paid $11.7bn for the company, which was founded in 1996, boasts a customer base of over 25,000 global companies, and employs approximately 2700 employees worldwide. HP believes that, with Autonomy, it could reshape the enterprise information platform to include structured and unstructured data and increase the efficiency, effectiveness and automation of enterprise business processes, while dramatically improving the user experience of today’s workforce. Ms Whitman is focused on utilising the Autonomy deal to take HP forward.

Ms Whitman is also trying to rectify other legacies of her predecessors. In 1999 HP appointed Carly Fiorina as CEO. Her decision to buy Compaq for $25bn made HP the world’s biggest PC manufacturer, but also led to a steady decline in revenue and the company’s shares to lose half their value. She was replaced by Mark Hurd who during his tenure presided over five years of revenue growth and a 130 percent increase in share value. However, in 2010 Mr Hurd was forced to resign after allegations of ‘inappropriate behaviour’ with a company consultant. When Ms Whitman took the helm, she knew HP would have a tough year ahead and focused on upping spending on research, increasing sales and turning around the company’s flagging services arm.
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