First Quarter 2012: Highlights
From the conference call 1Q-2012, Meg Whitman (CEO, HPQ) summarizes the performance of the company as follows
During the quarter HP has continued buying back shares, albeit at a much smaller scale than 3Q-2011. HP still has around $10 billion capital in its share buyback.
1Q-2012 Conference call
Q: How do we measure the performance of the management ?
A: The CEO offers the following scale. Her first step is to stabilize the revenue decline. At the moment the revenue decline is of the order of 7-8% in constant currency. The second step obviously is to increase the revenues again. She hopes to see the first step completed by the end of 2012 and by the end of 2013 she expects to see revenue growth.
The CEO keeps telling us that HP is looking towards the long term and the turnaround will take a bit of time. To increase the revenue HP will need to gain market share in every single market. Because of the competition a lot of these markets are seeing the unit price going down and HP has to sell more units to maintain the same revenue. Given the situation HP finds itself in this is not going to be an easy task.
The CEO is aware of these problems.
Q: What is her plan ?
A: The CEO puts the problems HP is facing in three buckets. The first one is fixing execution. The main issue HP is facing right now is the problems in its Stock-keeping unit (SKU). It needs to reduce the number of models it offers so as to achieve cost savings and improved efficiencies not to mention a simpler and better customer experience. To do this, HP needs to focus on the depth of its product offering instead of the breadth. In Whitman’s words HP needs to "remove unnecessary complexity from the way we design, manufacture, and deliver products."
The second bucket is addressing the ongoing issued in each of HPs business, from IPG, PSG, ESSN, to Services. She claims that the the eroding market share and profits is because HP under-invested in its business. This resulted in fiercer competition and allowed its competitors to gobble up HP’s market share and customers.
The third bucket is the ever-changing landscape and the industry shifts. HP had become complacent and had stopped innovating.
Let me summarize the conference call. Meg Whitman wants to increase the profitability of business by improving execution, cutting expenses, increasing revenue and improving the balance sheet. With the increased profitability she wants to invest in cloud, security, and information management to position HP as a leader for decades to come.
I agree with her on the increased profitability part and improving the business part but I hate the investment part. It seems again a waste of shareholder money to me. HP has not been very good with acquiring business and has consistently overpaid (Autonomy, 3Par) and then sometimes written down its acquisitions (webOS). Currently, because of the overpayments it has made for the businesses its equity is negative.
Furthermore, targeting on one goal is probably a safe bet but on three of them and all at once ? This does not seem like a good plan to me. Each goal among these is going to be very difficult to achieve but all three together is a recipe for disaster. Given that HP is suffering from near term headwinds, Whitman understands that she needs to fix those before embarking on her long term plan.
Meg seems very enthusiastic about the opportunity in front of her. She also gives very rosy outlook for HP and this is a bit unnerving. For a business leader, being grounded to the reality is something very important and I feel that maybe because of Whitman’s political career she lacks those. She talks about clarity, transparency, people wanting HP to succeed and the fact that HP has created a formidable asset base which will launch her into a long term leader in several different areas.
I like HP. It has good assets in software, hardware and OS. HP has all of this in house. Apple (AAPL, Financial) has done precisely that and look where it is now. HP with a good leader has all it needs to take on Apple and be a very formidable competitor. But I don't see Whitman as someone who can achieve this.
Meg gives us end of 2012 to stop the revenue decline and I will wait before doubling down until she can at least prove to me that she can do this. She needs to tred very carefully and as a shareholder I will be watching her. Let us hope HP can turn itself around.
From the conference call 1Q-2012, Meg Whitman (CEO, HPQ) summarizes the performance of the company as follows
- In PSG, the hard drive shortage and continuing difficulties in China contributed to a revenue decline of 15% year over year. With the supply challenges, we focused on profitability rather than market share and did a good job of delivering our operating margin of 5.2%. PSG is important to HP. It gives us great return on invested capital and a lot of synergies.
- In Imaging and Printing, year-over-year revenues decreased 7% with decline in Supplies and Hardware, in Consumers and Commercial and operating margins declined to 12.2%.
- In ESSN, revenue declined 10% and operating margin fell to 11.2% year-over-year. Industry Standard Servers revenue was down in a highly competitive environment that was compounded by the hard disk shortage.
- In Services, year-over-year revenues were up 1%, while operating margin declined to 10.5%. This continuing margin pressure in Services really goes straight to a couple of our major challenges like resource utilization and business mix.
- In software, with the addition of Autonomy, revenue grew 30% year-over-year with a 17.1% operating margin.
During the quarter HP has continued buying back shares, albeit at a much smaller scale than 3Q-2011. HP still has around $10 billion capital in its share buyback.
| Share buyback | 1Q-2012 | 4Q-2011 | 3Q-2011 |
| Repurchases (in $ millions) | 780 | 500 | 4,641 |
| Diluted share count (in millions) | 1,998 | 2,005 | 2,080 |
1Q-2012 Conference call
Q: How do we measure the performance of the management ?
A: The CEO offers the following scale. Her first step is to stabilize the revenue decline. At the moment the revenue decline is of the order of 7-8% in constant currency. The second step obviously is to increase the revenues again. She hopes to see the first step completed by the end of 2012 and by the end of 2013 she expects to see revenue growth.
The CEO keeps telling us that HP is looking towards the long term and the turnaround will take a bit of time. To increase the revenue HP will need to gain market share in every single market. Because of the competition a lot of these markets are seeing the unit price going down and HP has to sell more units to maintain the same revenue. Given the situation HP finds itself in this is not going to be an easy task.
The CEO is aware of these problems.
Q: What is her plan ?
A: The CEO puts the problems HP is facing in three buckets. The first one is fixing execution. The main issue HP is facing right now is the problems in its Stock-keeping unit (SKU). It needs to reduce the number of models it offers so as to achieve cost savings and improved efficiencies not to mention a simpler and better customer experience. To do this, HP needs to focus on the depth of its product offering instead of the breadth. In Whitman’s words HP needs to "remove unnecessary complexity from the way we design, manufacture, and deliver products."
The second bucket is addressing the ongoing issued in each of HPs business, from IPG, PSG, ESSN, to Services. She claims that the the eroding market share and profits is because HP under-invested in its business. This resulted in fiercer competition and allowed its competitors to gobble up HP’s market share and customers.
The third bucket is the ever-changing landscape and the industry shifts. HP had become complacent and had stopped innovating.
Let me summarize the conference call. Meg Whitman wants to increase the profitability of business by improving execution, cutting expenses, increasing revenue and improving the balance sheet. With the increased profitability she wants to invest in cloud, security, and information management to position HP as a leader for decades to come.
I agree with her on the increased profitability part and improving the business part but I hate the investment part. It seems again a waste of shareholder money to me. HP has not been very good with acquiring business and has consistently overpaid (Autonomy, 3Par) and then sometimes written down its acquisitions (webOS). Currently, because of the overpayments it has made for the businesses its equity is negative.
Furthermore, targeting on one goal is probably a safe bet but on three of them and all at once ? This does not seem like a good plan to me. Each goal among these is going to be very difficult to achieve but all three together is a recipe for disaster. Given that HP is suffering from near term headwinds, Whitman understands that she needs to fix those before embarking on her long term plan.
Meg seems very enthusiastic about the opportunity in front of her. She also gives very rosy outlook for HP and this is a bit unnerving. For a business leader, being grounded to the reality is something very important and I feel that maybe because of Whitman’s political career she lacks those. She talks about clarity, transparency, people wanting HP to succeed and the fact that HP has created a formidable asset base which will launch her into a long term leader in several different areas.
I like HP. It has good assets in software, hardware and OS. HP has all of this in house. Apple (AAPL, Financial) has done precisely that and look where it is now. HP with a good leader has all it needs to take on Apple and be a very formidable competitor. But I don't see Whitman as someone who can achieve this.
Meg gives us end of 2012 to stop the revenue decline and I will wait before doubling down until she can at least prove to me that she can do this. She needs to tred very carefully and as a shareholder I will be watching her. Let us hope HP can turn itself around.
