HP’s Road Back to Profitability Fraught With Challenges

By Jeffrey Burt

The rapid decline in the worldwide PC market took a lot of tech vendors by surprise, including HP, which is now the world’s second-largest PC vendor after being overtaken by Lenovo. The Personal Systems Group saw revenue in the last quarter fall 11 percent and consumer PC sales drop 22 percent. There’s some hope that corporations will begin refreshing their PCs now that Microsoft support for Windows XP is soon coming to an end, but the business will still be under pressure due to competitive pricing and the trend toward mobile computing.

HP’s history in the mobile space has been a troubled one. After buying Palm for $1.2 billion in 2010, the goal was to take the critically acclaimed webOS operating system and use it as the foundation for everything from smartphones to tablets. But the webOS-based TouchPad quickly came and went. Now the company is relying on Windows and Android for tablets—which means competing with the likes of Samsung—and while executives say HP will start building smartphones again, that is in the future.

Revenue for the company’s industry-standard servers fell 11 percent, one of the red flags in an overall poor showing by the Enterprise Group. Servers based on x86 are becoming increasingly commoditized, and with that comes extreme pricing pressures. In addition, the competition is tough, from IBM to Dell to Cisco Systems. There is innovation going on, as illustrated by the new highly energy-efficient and dense Project Moonshot systems unveiled in April, but Whitman noted that even here the execution has not been good, and that HP needs to move faster.

HP’s high-end Integrity and Nonstop systems, based on Intel’s Itanium platform, over the past several years have seen revenue and server market share dip, just as other Unix systems have in the face of x86 server growth. However, HP’s Business Critical Systems (BCS) Group was hit hard when Oracle announced in 2011 that it would no longer port its enterprise software to Itanium. Although a judge ruled against Oracle, the damage to HP’s business was done, and BCS has struggled to recover, with revenue in the quarter falling 26 percent. With Project Odyssey, HP is looking to bring x86 and Itanium blades into the same enclosure.

Overall storage declined 10 percent in the quarter, with traditional tape and hard-disk storage seeing a revenue decline of 37 percent, thanks to pricing pressures and the move to software-based solutions. However, the converged storage offerings grew 37 percent in the quarter. HP executives pointed to success in such areas as the company’s 3Par and StoreOnce solutions.

Revenue in the networking business was flat, which Whitman said can’t happen. “We are the upstart in this business, so a flat networking performance is not what we need to see,” she said. Executives said the company is doing well in wireless LAN and while its software-defined networking (SDN) solutions are getting good interest, weakness in spending in the U.S. public sector hurt.

Whitman pointed to the company’s enterprise services as a unit that had solid execution in the quarter, even though revenue fell 9 percent. She noted improvements in signings, though most are renewals, and said the company will work on go-to-market strategies that target such areas as cloud, big data and application modernization. Meanwhile, technology services revenue—under the Enterprise Group umbrella—was down 7 percent.

Not that long ago, the printing business—both the machines and the ink—was the stalwart in HP’s portfolio lineup, a proven and reliable revenue producer. But times have changed, and while Whitman praised the printer unit for performing well last quarter, its revenue still fell 4 percent, though hardware units were up 5 percent—the first growth since 2011. Executives are high on such programs as Ink Advantage and products such as the Officejet Pro X.

The company has spent a lot of time, effort and money building up its cloud and converged solutions offerings. However, there is concern that while HP may have a strong offering, it may be behind some competitors. “Rivals such as IBM and Dell have more effectively positioned their converged data center solutions as answers to business challenges in contrast to HP’s broader, workload-centric focus,” Technology Business Research analyst Jack Narcotta wrote. “As a result, HP will be challenged to expand its footprint in the solutions market and leverage its combined solutions to reverse revenue declines in its discrete server, storage and networking product segments.”

According to company executives, Europe continues to be a weakness, while revenue in the Americas also fell, declining by 7 percent, thanks in part to U.S. public sector spending being down, as well as weakness in demand in Brazil and Canada. India is still a strong market, but Whitman said that “China is softer than we had anticipated, and it is actually across the board.”

Whitman last year said 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 has brought stability to the top office, and now is putting her own executive team in place. Now the team has to execute.

HP plays in many segments of the tech industry and faces a tough lineup of rivals, from IBM to Cisco to Lenovo. And it likely will soon find itself competing with a newly private Dell, which will be free from the financial constraints of a public company in pursuing its enterprise IT solutions efforts.