A few days ago, Meg Whitman, CEO of Hewlett-Packard (HPQ) gave an interview in which she provided some interesting insights about the company. She said that the largest computer manufacturer in the world could take as many as five years to get back on track and that she was drawing inspiration from Starbucks (SBUX). She has a big task ahead of her as she struggles to reverse the slump in sales and profits, eliminate 27,000 employees, cut debt and streamline inventory management. In fact, the challenge facing her is more similar to the task that Lou Gerstner faced when he took over IBM (IBM) in the 1990s while making sure that HP does not follow Eastman Kodak which collapsed in January.
Whitman has a colossal task ahead of her given the fall in HP stock prices and the decline in sales revenue over three consecutive quarters. The company has lost market share in personal computers and was slow in developing cloud computing capabilities as well as the delivery of storage and services over the Internet. She also has to address the concerns of one of HP's biggest partners SAP AG (SAP) because of the thousands of companies that run SAP applications on HP hardware. If these customers switch to IBM or Oracle (ORCL), sales at SAP could be badly affected.
To add to the HP's problems, a major dispute has developed with Oracle which could end in a major legal battle. In March 2011, Oracle decided to abandon software development for itanium chip-based servers on the assumption that Intel (INTC) could stop manufacturing the chip on the grounds of obsolescence. This could have a major impact on HP which is the main user of these chips and requires the support of Oracle to market its servers. Intel has denied any intentions of stopping the manufacture of itanium chips but Oracle has stood firm. The problem is that after the acquisition of Sun Microsystems, Oracle is a major competitor in the server market. Sales of Itanium hardware fell 23% to $421 million in Hewlett-Packard's second quarter ended April 30 and HP is now demanding a court order for restoration of Oracle's support as well as $500 million in damages. If the ruling is not forthcoming, HP plans to seek damages of $4 billion from Oracle.
The company had a bit of good news when figures for the first quarter of 2012 showed that it had managed to increase its global market share from 16.9% to 17.2% on the back of an increase in shipments of more than 6%. Meg Whitman also indicated that the printing business and the PC business to be combined into a single entity. There had been earlier speculation that HP was going to spin off its personal computer business prior to selling it.
HP has long been among the most well-known and respected of the global technology companies and has a range of business that spans printing, software, hardware and infrastructure. The second quarter results for 2012 showed net revenues of $30.7 billion down 3% on a year on year basis. Year over year net earnings at $1.9 billion were down 28% and diluted EPS was down from $1.05 a share to $.98 a share. The results were ahead of the consensus estimates. Around one third of the revenues came from the United States while two thirds came from the rest of the world. HP needs to watch competition from Cisco (CSCO), the leader in enterprise networking as well as from the newly resurgent Xerox (XRX) which has become much more aggressive about the printing business.
After a series of disasters and inept management, what worries me most about the HP stock is how much rides on the shoulders of Meg Whitman. Her performance to date has been flawless and she has been direct and transparent with employees and investors alike. She has announced a reduction in overall staffing by the end of the year 2014 that will save the company around $3 billion annually. Since Hewlett Packard has acquired around $40 billion worth of businesses over the last six years, a drastic downsizing is probably essential. I believe that she will renew focus on research and development which has been the hallmark of the earlier excellence of the company. She has indicated that she wants to see more resources plowed into the potentially exciting cloud-based and database services. This is not going to be easy because HP has to play catch-up with such major technology powers as Microsoft (MSFT) and Oracle.
She has also started to fix one of the most disappointing numbers in the quarterly earnings report which showed a drop in licensing revenue to $970 million. The acquisition of Autonomy was expected to generate much more, and Whitman has parted company with Mike Lynch, the founder. For better or for worse, she will now reshape Autonomy to the HP way of business. The strong showing in personal computers sales is an indication that the market may be rebounding and the new tablet to run on the Windows 8 operating system should help the company to become more competitive. The problem with HP seems to be the size of the company and the bureaucracy that has developed over many years.
For all these encouraging signals, the company still has a long way to go and I would not rush into buying HP stock. The company is fundamentally sound and seems to have the right leadership but I would consider it prudent to wait a while before deciding to invest. I would rather watch closely to see if these reforms are beginning to have an effect. I would, however, hold on to an existing investment because the future appears to be brighter than it has been for quite a while.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.