HP and Cisco executives are both reorganizing their companies in hopes of spurring better financial results. In HP's case, that means bulking up its IT services.
and Cisco Systems may be fierce competitors, but they now are finding
themselves in the same boat.
A week after Cisco CEO John Chambers
spoke of further company
reorganization and job cuts in the face of continuing disappointing quarterly
financial numbers, his counterpart at HP announced May 17 moves he is making to
shore up his company as it struggles with a weakening consumer PC
market, an underperforming services unit and the residual effects of the March
earthquake and tsunami in Japan.
HP CEO Leo Apotheker told analysts and journalists in a conference call that
while the company was going through a difficult phase-HP is cutting its profit
outlook as it increases spending around the services business-the company's overall
health is strong, and that short-term pains now will only make
the future brighter.
continue to manage our business prudently," Apotheker said during the
second-quarter earnings report
got off to an inauspicious start when executives
were forced to announce the numbers a day early. Initially scheduled for May
18, the announcement was moved after an internal memo from Apotheker to some of
his executives was reviewed by the Wall Street Journal
in a story May 17. In the memo, the CEO warned of "another tough quarter"
coming up and warned that HP "must watch every penny and minimize all hiring.
We have absolutely no room for profitless revenue or any discretionary
have said the memo should not be interpreted as foreshadowing any layoffs.
Marshall, an analyst with Gleacher & Company, said in a May 17 report that
HP needs to show itself as a more stable company again.
known for its consistent performance and operational excellence, [HP] is now
associated with more undesirable attributes (e.g., management changes, lowering
of guidance, internal leaks, etc.)," Marshall wrote. "In our view, the
investment community holds sacrosanct both consistency and lack of surprises
from its portfolio companies. Unfortunately, [HP] is delivering neither
conference call, Apotheker and CFO Cathie Lesjak said that the consumer PC
market, which they had warned earlier this year would continue to be down,
turned out to be weaker than expected. That contrasts with the commercial PC
market, which Apotheker said continues to undergo a healthy refresh cycle.
Overall, HP's Personal Systems Group saw revenue fall 5 percent from the second
quarter last year. However, revenue from commercial systems grew 13 percent,
while consumer client revenue fell 23 percent.
market continues to be bifurcated," he said.
the company would continue to work to shore up the consumer PC business, adding
that he was optimistic about the upcoming launch this summer of HP's TouchPad
webOS-based tablet. He also said PC demand in Japan would continue to be weak
for a while as that country deals with the aftermath of the March 11 earthquake
and tsunami. The disasters also will affect HP's supply chain to some extent.
an analyst with Technology Business Research, said it's not surprising that
consumer PC orders are off.
sales have slowed because of economic uncertainty, the fact that the consumer
recovery in PC sales was earlier than the commercial one, and consumer interest
in tablet PCs," Gottheil said in a report, adding that HP's PC pricing also is
playing a role in sales.
the services unit that will get much of the attention, with Apotheker
announcing that HP will hire a new executive vice president for the business
who will report directly to the CEO. In the interim, Ann Livermore, executive
vice president of HP's Technology Solutions Group, will oversee the services
HP also will
add bodies to the IT services business, which Apotheker has said has focused
too much on low-margin services-such as computer repairs-while not focusing
enough on higher-margin services and consulting, including application
not yet shifted our services business to higher-value, higher-margin and
higher-growth categories," he said. "We have over-executed
operationally and under-invested strategically."
HP has had a
strategy for pursuing the higher-margin services, but has failed to follow it,
Apotheker said, noting that the problems began during the tenure of his
predecessor, Mark Hurd. The "significant transition of the services business ...
should have been happening some time ago," said Apotheker, who has been CEO
since November 2010. "It should have been happening before. It will happen
He noted that
reinvesting in the IT services business now will mean a healthier unit later.
If HP didn't do it now, "then we'd be sitting here with a business that was
running out of steam," he said.
HP's direction regarding services will be important.
saw gradual improvement in its higher value-added services' sales in 1Q11," TBR
analyst Beau Skonieczny said in a research note. "However, it will need to be
more aggressive to support profitable top-line expansion."
The success of
Apotheker's efforts will go a long way in determining HP's longer-term
financial health, according to Gleacher & Company's Marshall.
"If [HP] can
successfully drive growth in its IT Services unit over the next few quarters,
we believe the company will avoid permanent -value trap' status," he wrote in
his report. "However, if this strategic investment initiative fails to
reinvigorate revenue growth in the services group, the company's financial
model will continue to bleed."