HP stock is up 9% in after hours trading, following better than expected quarterly results and the announcement of big headcount reductions (including the loss of Autonomy founder Mike Lynch, as highlighted in a separate HotViews post here). However, there’s little in the latest pronouncements from CEO Meg Whitman to suggest the company is getting to grips with its fundamental strategic challenges.
Firstly, the Q2 results. Total revenue was down 3% at $30.7bn, which was better than analyst expectations. HP is not alone in finding EMEA especially hard going - the region was down 7% y-on-y. Meanwhile, overall operating margin fell to 8.9%, from 11.3% in Q2 of FY11. Investors liked the EPS number, however, which at $0.98 was ahead of company guidance of $0.88 to $0.91, despite being down y-on-y.
Whitman emphasised the positives in the numbers. “While earnings and revenues were both down over the prior-year period, the trajectory of the decline began to flatten in Q2, which is encouraging”, she told analysts. But these are hardly the results of a business that has begun to turn things around.
Personal device sales remained disappointing. Notebook revenues were down 3%, units down 6%. That’s slightly less bad than Dell’s laptop performance (see Dell dives as laptop sales slump), but HP is a victim of the same competitive pressures that afflict its Texas-based rival.
In services, revenue was down 1%, which is not too far below industry par in the current market. But operating margin in services continues its downward slide, falling to 11.3% from 15.4% in the previous year (and we suggest you search on 'miracle margins' in the UKHotViews archive). In fact, operating margin fell in all of HP’s major lines of business, including software, imaging/printing and servers/storage/networking.
Whitman’s response to the limp topline and sagging profits is to attempt to make HP more efficient. Her “multi-year productivity initiative”, with its 27,000 job losses (or 8% of the workforce), will be the biggest programme of headcount reduction in the company’s history and entails projected annual savings of $3.0-3.5bn following FY14.
Whitman argues that by making these savings, the company can afford to invest in R&D and innovation, with a boost for HP Labs and a focus on growth areas like cloud services, security and software analytics. Although these are good places to put bets for future growth, none of this represents radical changes of direction for HP.
The fear must be that the company has grown too large, dysfunctional and slow-moving to get back successfully to its founding values of “invent”, in a market where innovation cycles will only accelerate. Meanwhile, it seems unlikely that even a company of HP’s formidable resources and heritage can be an innovation leader across all the areas in which it continues to compete.
Until now, Whitman’s approach has been “more of the same, only better”. Now it looks like “more of the same, only better and with fewer staff”.
By the way, can we very strongly suggest that you buy, beg, borrow or steal the recent issue of Fortune magazine with the F500 rankings and read the article entitled "How HP Lost Its Way". It makes sense of all of the above.