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2013, 7:52 P.M. ET
HP’s Whitman Talks
of Dell ‘Cratering’ Its Financials, And the DNA of Productivity
By Tiernan Ray
this afternoon’s report by Hewlett-Packard (HPQ)
of fiscal Q2 revenue that missed expectations and
profit per share that beat, and a higher-than-expected forecast for
this quarter, CEO Meg Whitman was kind enough to talk
with me by phone this evening.
have rocketed in after hours, currently up $2.88, or almost 14%, at
kicked things off by stating that “The turnaround is on track, and we
did what we said we would do, which is important because this was an
unpredictable company for a very long time.”
By that she
means that the company has proceeded along a path laid out at its
analyst day event in September. “We have focused on
generating cash, and we have generated a lot of it,” she said,
pointing out that total cash flow in the first two quarters of this
fiscal year that began in November now totals the entire amount the
company had projected for the full fiscal year.
also went through the things that went right and went wrong last
quarter. She emphasized that HP’s “enterprise services”
business has “stabilized,” with operating profit up 1.3 points last
quarter from the prior quarter, to 2.6%. “We will get some kudos for
“3Par” storage product saw sales rise 82%, noted
Whitman. “It is the perfect storage product for the new style of IT,”
networking business continued to grow, and the company formally
unveiled its “Project Moonshot” server family.
On the topic
of services, Whitman notes that there has been some
benefit from a slower “runoff” of large customers.
What she means is that three large customers had previously stated
their intention to transition away from HP’s offerings, because they
were “changing their approach for outsourcing,” says Whitman, but that
hasn’t played out quite as expected.
forecast a runoff in 2013, and it turns out that is happening more
slowly. Customers are slowing it down because these transitions are
more challenging than they expected. We’re actually doing a good job
of managing their transitions for them.”
of better-than-expected services revenue now, concedes Whitman, is
that “It will be harder to grow enterprise services in 2014.”
What does she
plan to do about that, I asked. “We have brought on a new head of
sales, we are really working on strategic enterprise services, on Big
Data, working on mobility for our clients, and security, things such
as apps modernization. We’ll use all of those things to try to make up
for some of that expected challenge in 2014.”
Personal Computers, of course, were a less glowing side of
results, with sales in the “Personal Systems” unit
down 20%, year over year. “PCs continued to decline, and our
industry-standard server performance was not what we hoped it
would be,” thanks in part to aggressiveness on the part of
“but we did the right things in terms of managing the balance between
share and profitability,” said Whitman.
As far as
Dell is concerned, I asked Whitman what she will do if Dell continues
to pursue aggressive price cuts as it rolls through an M&A
battle between CEO Mike Dell and activist
Carl Icahn that seems to leave the company caring
little about profit.
Well, they [Dell] really cratered
their earnings, you’re right, and that the strategy you pursue when
you are going private, and you’re basically going to take on a big
chunk of debt and try to then take it public again at a higher price.
But we have competed for a long time with very aggressive competition,
from Acer some years back, Lenovo,
Dell IBM (IBM).
We have to figure out a way to compete regardless of who the
competitor is. It’s about how do we get the right product for the
right product segment, and have it be appropriately featured. How do
we revive the channel in such a way that they love doing business with
us. Listen, we’re always going to have very good competitors, we have
to be able to compete, to constantly improve our cost structure. It
comes back to the notion of continuous improvement.
I noted that
the quarter saw some decent quarter-over-quarter operating
margin improvement (see
my earlier post on the changes in operating margins), and I asked
Whitman how much of that improvement was permanent.
a restructuring program because I said we had to get
costs in line with revenue and we had to regain the capacity to
invest; we’re slightly ahead of plan on that,” said Whitman.
was down 10% last quarter, and operating expenses were only down 5%.
So, some people would say, why didn’t you cut it by more. The answer
is that as we’ve made restructuring progress, then we reinvested some
of those savings in the business.”
said HP cannot simply rely on cuts. “We can’t take more charges beyond
what we have now,” she said.
build productivity into the DNA of the whole company”
rather than hoping for “episodic” cost savings:
Efficiency has been a bit episodic in
this company. There was this pattern of taking out some costs, and
then going back to the way we were. We can’t go back to the way we
were. We have to get improvements in supply chain, greater agility,
the right matching of product to customer needs. We have to create a
new operating muscle at this company that isn’t episodic but regular.
General Electric (GE)
has done it, many companies have done this. This is what really great
companies do. We have to build this into our DNA.
asked Whitman about Cisco Systems (CSCO),
which hopes to push aside HP in CEO John Chambers‘s
quest to be the ultimate IT provider. I note that Chambers has always
been very complimentary toward Whitman in his remarks.
Allow me to return the compliment. I
have a lot of respect for John Chambers. And he helped me a lot when I
was at EBay (EBAY).
We feel very good about our competitive position. We grew 2% in
switching last quarter, they were actually down 2%. As far as selling
solutions, we’re competitive in that market. We actually coined the
term “converged infrastructure.” With our services arm we have the
advantage we need to sell solutions to these companies. We are the
only company that can go all the way from the device to the data
center. We just have to get our divisions to dance well together. But
I truly believe we are differentiated by the breadth of our product
line. Some people think it’s a concern, but I think it’s a real
positive for us.
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