HP Can Look to IBM, Apple for Turnaround Guidance: Analysts
Hewlett-Packard’s financial numbers hit a 10-year low after CEO Meg Whitman outlined many challenges facing the technology stalwart, warned that earnings in 2013 will remain down and said turning around the company will take years.
Whitman’s frank assessment of her company before financial analysts Oct. 3 and the strategies she and her executive team are putting in place did not sit well with investors or Wall Street observers, sending the stock price falling 13 percent, where it settled at the end of the day at $14.91, the lowest in a decade. And after a night of sleeping on it, neither the analysts nor investors seemed to have second thoughts—as of 2 p.m. ET, the price had climbed only 6 cents.
While many were put off by Whitman’s statements of a four- to five-year turnaround, some industry analysts said it took at least that long for two other tech giants—IBM and Apple—to recover after several years of operational problems and financial issues.
Her presentation to analysts kicked off a rough day for a company that has been in a state of relative upheaval for the past two years, during which time revenue and profit have steadily fallen—HP has lost 50 percent of its value in just over a year—and three different people have occupied the CEO seat.
It’s not a secret that HP has been adrift over the past two years, and analysts have debated various scenarios and moves the company could make to right itself, such as selling off its printer and PC businesses. However, many still seemed surprised by what Whitman said—including that it will take into 2016 before the company has fully recovered, and the dour news about revenue and profit next year.
Whitman apparently wanted to get all the bad news out of the way at one time. According to The New York Times, HP executives, who didn’t want to be named, said the CEO chose to put all of it out into the public at once so the company could focus on rebuilding rather than being distracted by a constant drip of bad financial news.
However, the day also showed the challenges Whitman is facing as she asks for time and patience. Investors and Wall Street analysts tend to view things on a quarter-by-quarter basis, but tech industry observers said that what HP faces is akin to the turnarounds in the 1990s and early 2000s at IBM and Apple.
“Apple took between five and seven years, depending on when you make the cut, and IBM about the same,” Rob Enderle, principal analyst at The Enderle Group, said in an email to eWEEK. “This suggests HP’s plan is very aggressive, but [Whitman] is also starting in better shape with a profitable company, while both IBM and Apple were bleeding badly at the start of the process. On the other hand, investors typically want results in a quarter, and for any company, particularly one of HP’s size and complexity, that is just not reasonable. Her board knows this is a long-term process.”
Roger Kay, principal analyst with Endpoint Technologies Associates, said IBM is an example in how an established, top-tier company that hits a difficult point can revive itself. However, HP is faced with a particular hurdle if it wants to follow IBM’s lead; Big Blue, even throughout its tough years, continued to invest in research and development. However, starting under CEO Carly Fiorina’s tenure and accelerating under her successor, Mark Hurd, R&D investment was drastically reduced, hampering innovation at the company and cutting it off from its legacy.
“What made HP great was their R&D,” Kay told eWEEK. “But under Fiorina and Hurd, R&D was squeezed.”
However, Whitman said that reinvesting in R&D was a priority for HP, which Kay said should help the company in its recovery efforts. “There’s nothing that says that HP can’t achieve” a recovery similar to that of IBM, he said.
But Enderle, Kay and other analysts agreed that what HP needs to do will take years, noting that the company’s problems had been building for years, throughout the tenures of Fiorina, Hurd and Leo Apotheker. Kay said Whitman faced “kind of a mishmash” when she took over in September 2011, being the third CEO at HP in less than a year, and the fourth since 2005. Whitman said the rapid turnover of leadership has hurt the company.
"My belief is that the single biggest challenge facing Hewlett-Packard has been changes in CEOs and executive leadership, which caused multiple inconsistent strategic choices and, frankly, some significant operational miscues," she told the analysts. "It’s going to take longer to right this ship than any of us would like."
Enderle, who was at the HP event, agreed.
“Each of these CEOs was vastly different,” he said. “Carly was a visionary building HP into a consumer company; Hurd couldn’t spell ‘vision’ and was more of a COO and expert at cutting costs and hitting quarterly numbers [he gutted HP], Leo was a software guy and tried to turn HP into a software company after inheriting a shell. If you’d wanted to destroy the company, you likely couldn’t have picked a better group to do it—widely polarized with a guy in the middle that was bleeding the firm to death. You can’t achieve a goal timely if that goal is changing dramatically mid-course, or if you get a guy that starts throwing the fuel overboard to increase short-term speed.”
Now that the bad news is out and HP has taken its hits, Whitman’s job turns to rebuilding. She and her executives outlined numerous initiatives to make the company work better. On the product side of things, that means keeping all the business units—including printers and PCs—focusing on high-growth areas like cloud, mobility and big data, and reducing the number of products to sharpen the company’s focus.
Internally, she is working to make the back-end operations more efficient and get compensation more closely tied to performance. HP also is in the process of reducing expenses by $3.5 billion by 2014, including cutting 29,000 jobs from a workforce of about 349,000.
And all this must be done in a highly competitive environment and amid a struggling global economy.
Some analysts told media outlets that they were surprised at the low financial numbers Whitman and Chief Financial Officer Cathie Lesjak were forecasting for 2013, and were not sold on the turnaround strategy. However, Enderle said the company seems to be moving in the right direction.
“I was disappointed that they didn’t talk about fixing their horrid acquisition process, but they mitigated this by saying they weren’t planning on making any more for a while, giving me hope it might be fixed before they tried another one,” he said. “I was particularly impressed with HP’s design focus, which is very Apple-like, and their tight focus on milestones and metrics. It sounded like they had a plan and not only were executing on it, but that it was based on fact and not wishful thinking or being covered up by misdirection. As these things go, this was one of the best events of its type I’ve attended.”