HP Revenues Hurt by Slowing PC, Server Demand

By Jeffrey Burt  |  Posted 2013-08-21

HP Revenues Hurt by Slowing PC, Server Demand

Hewlett-Packard CEO Meg Whitman says the multi-year turnaround of the tech giant is continuing to move forward, despite setbacks in the company’s latest quarterly financial numbers.

HP saw its fiscal third-quarter revenues hit $27.2 billion, a drop from the $29.7 billion from the same period in 2012 as the contracting global PC market continues to hammer the company, and its Enterprise Group struggled with a competitive market and execution missteps.

Net income hit $1.39 billion, a significant jump from the $9.8 billion loss from a year ago, which was due in large part to a significant write-down HP took for its $13.9 billion acquisition of services company EDS in 2008.

Given the financial numbers, Whitman—who had been hopeful of growth in fiscal year 2014—told analysts and journalists on a conference call Aug. 21 that she no longer expected year-over-year revenue increases for the year.

She noted that some HP businesses—including printers, enterprise services and software—had a strong quarter, though revenues were down in every segment except software. However, much of the focus fell on the PC business and Enterprise Group, which is responsible for the company’s broad server, storage and networking offerings.

The continued decline in the Personal Systems Group’s numbers—revenue fell 11 percent, including a 22 percent drop in consumer PCs—was not surprising, given the quarters-long slowdown in PC sales worldwide as consumers and business users migrate to mobile devices such as smartphones and tablets.

However, Whitman said the performance of the Enterprise Group was “very disappointing,” and said that while there were some external issues, including softness in Europe and China, impacting the financial numbers—particularly in such areas as industry-standard servers and some storage products—much of the problems had to do with execution.

“Overall, the enterprise group's performance was very disappointing,” she said during the conference call. “Mainstream server weakness was driven by execution challenges, competitive pricing and a misaligned go-to-market model. This impacted our revenue and profitability. The net impact of these execution challenges is an expected loss of five points of market share on a revenue basis.”

To help fix those problems, Whitman is bringing in a new executive to oversee the Enterprise Group. Dave Donatelli was reassigned within the company, and COO Bill Veghte will take over. She noted Veghte’s experience in both software and sales as key assets for the business unit.

HP Revenues Hurt by Slowing PC, Server Demand

“During his tenure at HP, he has run HP Software, held the responsibility of chief strategy officer and for over 15 months has served as HP's chief operating officer,” Whitman said. “As COO, Bill helped to create HP's blueprint for the future and deeply understands the strategic challenges and opportunities facing both the company and its customers. As hardware becomes more standardized, leadership solutions are increasingly differentiated by the software layer that drives the hardware. This is true for both traditional IT and cloud environments.”

The executive switch comes two months after Whitman removed Todd Bradley as head of the PC business, replacing him with former Lenovo and Acer executive Don Weisler, who had been with HP as senior vice president in Asia.

Despite the disappointing quarterly numbers, Whitman noted that the company is continuing to reduce its expenses, thanks in large part to the 29,000 job cuts announced last year as part of the larger turnaround strategy. And she is optimistic about the company’s future.

“Overall, I would say, our turnaround continues,” Whitman said. “We are moving forward against our plans and I remain comfortable with where we are heading.”

She added that even with all the cost-cutting and reorganizing, the key will be what HP sells to customers.

“HP’s turnaround will happen on the back of great products and services,” she said.

Some analysts said that while HP is working to expand its product portfolio, executives still must figure out how to deal with the continued problems in PCs and industry-standard servers.

“HP continues to control expenses and reallocate savings to fund lucrative, unified product, service and solution initiatives that allow HP to grow profit despite declining revenue,” Jack Narcotta, an analyst with Technology Business Research, said in a research note. “The strategies implemented by CEO Meg Whitman and her executive team have not provided remedy to triage shrinking market share and declining revenues. HP has yet to prove it can grow its non-PC and server business to offset staunch declines in those two industries, and a hyper-competitive pricing environment that will persist through 2014 will limit HP’s ability to rebound from its downward growth trajectory.”

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