Monday, October 1, 2012

Meg Whitman: It's Not Easy Being Me

HP's media advisers placed a prominent, but curious story in September 29th's New York Times.  It would seem to be timed to October 3rd's Security Analyst Day at HP.  Hopefully, the story will set up some announcements or perspective that will shape a more positive Wall Street view on HP's share price.

The Times writes that Meg Whitman,
"...believes that Wall Street doesn’t quite get it — doesn’t quite see the promise she sees."
I don't know how many times I've heard this quote from incoming CEO's over my years as an analyst.  In most cases, what Wall Street saw was very much closer to future reality than what the CEO saw through rose-colored glasses.  Meg, please drop this line and never repeat it, even if fawning analysts pitch it to you.  The smart investors never got Enron or Tyco either.

A Bernstein analyst/cheerleader is quoted as saying, "This is now the cheapest big stock in the past 25 years."  He must "get it."  How many of the hundreds of other, historically cheap big stocks got cheaper or went to zero?  It's an empty statement.

Institutional portfolio managers are generalists, and even their analysts follow multiple industries.  They need to be educated, in market and financial terms, about where the company is going, how it's getting there, and what's at the end of the rainbow in terms of margins and returns.  The sins of the past and even the challenges of the present aren't that important: investors are buying the future. If the present weren't challenging, Leo A. would still be here. 

Meg Whitman says,

“It (cloud computing) is a shift bigger than anything in our memory,” Ms. Whitman says. “We have to get ahead of the curve.”

This may very well be true.  It does create problems for analysts and investors who are modelling the company's future today.  This statement suggests that an investor who took the local peak margins in HP's business segments, grew revenue forward at a modest single digit rate, and took in restructuring benefits to estimate the future peak margins, might be totally off base.  But, this is exactly the calculation that most investors do to project an upside. 

Some of the current business segments may never achieve their former peak margins precisely because these big shifts will obsolete some of the business offerings and their pricing.  So, HP needs to help investors understand how this will play out.

The other bromide that HP bulls bring forward is the notion of being a "one stop solution" for the corporate IT buyer.  What if the future buyer refuses to spend that way?  What if the buyer demands interoperability of components, "plug and play?"  Software architectures have to be open.  No proprietary systems.  Buy the "best of breed" for every node of the operation.  This would be a "big shift," and it is already taking shape in areas like health care IT. 

HP provided this picture of a self-contained self-contained "cloud pod" of servers, storage and networking.  HP says that 20 units per month are being produced in its Phoenix operations, and each would sell for $20 million.  The advantage, ostensibly, for the corporate buyer would be that it could be deployed sooner than the 18 months needed to build a conventional data center. I'm not sure I get this idea, as shielding these kinds of units from all kinds of attacks would require significant site preparation also.  Again, let's get the context for why this might be important.

The Autonomy question still needs to be answered.  Besides the CEO having a digital dashboard (another hackneyed IT phrase) for Autonomy, is this the platform to take HP into the Big Data future?  Any more writedowns?  Some industry types suggest that their sales penetration pre-acquisition was narrowly focused on areas of Internet security rather than on the broader analytics of Big Data.  Meg, please put some meat on these bones, and be specific.

Saying that HP needs four more years to get "confidence in itself" is a troubling statement.  By that time, hopefully the company should be making some real money, which is the biggest single factor in generating confidence among employees.  Options that are in-the-money are a real tonic for the middle and upper management ranks.  Hopefully, your statement was quoted out of context. 

Why not give some guidance on where the company is going revenue and earnings-wise?  Put all the caveats and risk factors out there.  Have the CFO run this gauntlet: it's not that hard.  Put some kind of floor on the expectations and let them (hopefully) rise from there. 

Meg Whitman also says for the Times, "I am the the first (HP) CEO in a long time who is from the Valley."  This statement sounds a bit delusional.  Having board members or the CEO from a geographical provenance wouldn't seem to be associated with value creation. 

The New York Times writer, Quentin Hardy had some interesting asides in his text, apart from all the feel good material,
  • "Ms. Whitman has plenty of impressive-sounding stats at her fingertips." (they're not really ones you'd write down in your notes)
  • "The fact is, HP isn't what it used to be."
  • "Profit margins at I.B.M. and Apple are several times that of H.P. And H.P.’s share price, at just over $17 on Friday, is about where it was in 1995."
  •  "Instead of standing at the confluence of the phenomenon (mobile, cloud and Big Data), though, H.P. is on the sidelines, with most of the parts but none of the integration to make it a leader. ....H.P. sometimes seems like a place of siloed relics...:
  • "Everyone knows viscerally how fast change can overtake a legacy business — and how hard it is to change."
HP, and its new CEO, needs to meet all these questions head-on and answer them clearly and with numbers which show the contours of the way forward.  No more excuses about the "mess I found." 

Here's hoping for a successful Analyst's Day.

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