Friday, October 5, 2012

The Sound of Cannons: Thoughts on HP's Week

HP shares lost 14 percent of their value this week and touched levels not seen since 2003.  Analysts who liked the stock at much higher prices, with outlandish targets, reduced their ratings. Gee, thanks for the advice! 

Given the recent outlook from Analyst Day, it's safe to put away my HP folder for a while.  I have a few closing thoughts, which diverge from the "new consensus" on HP:

  1. The same trends that are buffeting HP, such as commoditization of hardware, next generation data centers, and cloud computing, are weighing on the other large competitors, such as Cisco, EMC and others.
  2. Margin compression is not, and will not be, unique to HP.  Cisco's sixty percent plus gross margins can't be sustained for truly commodity products.  Even though they have managed it well, the recent quarterly compression was the biggest in recent history. 
  3. Some HP analysts now have Dell as a "Buy" and HP as a "Hold/Sell."  Dell is the ultimate commodity player: it's how they defined their offering.  Although they are purchasing other companies like Compellent to diversify the offering, it's not clear to me that theirs is a superior strategic path that will be executed without hiccups and surprises.  
  4. VMW is a force to be reckoned with, but they too had issues in 2008-9, and their TTM revenues for 2012 are $4 billion or so; this is about the size of the HP software business.  The new HP software leader should be a big plus in moving this business forward, with at least VMW operating margins, or better I would believe.
  5. HP services cannot become Accenture or IBM, nor should they try to morph into these models. 
  6. Changing the pricing alternatives for the next generation IT buyers is going to be a challenge for all the players. HP seems to recognize this, based on Analyst Day. 
I really believe that the biggest challenges to the CEO and her new management team are internal.  The reference to macroeconomic headwinds, like currency and potentially cratering European demand, should not have been news to anybody, but they are now fully disclosed risks. 

Managing the loss of a large number of employees, letting the ongoing organization work through a grieving process, attracting a new generation of talent with different skills, meshing them into an organization that is large, but hopefully not sclerotic, and instilling belief into the organization that it can win---these are the things that will carry the day. 

If people believe that HP is a place to mark time while they look for other opportunities, then it will be in real trouble.  Unfortunately, none of these issues can be tracked externally with numerical indicators.  Customers, competitors, partners,and savvy observers, however, will all know. 

The board of directors that CEO Whitman needs to help her move the company forward is a different one from what is there today.  Now that the CEO has finished the fact-finding, channel checking and strategic reset, she should take on this task because it will be critical, in my opinion, for moving the company away from some of the flawed assumptions of the past which led to the acquisition of EDS and the absurd price paid for Autonomy. 

Turn that focus inward, HP.  Make the next corporate management retreat at a Zen center!  It will take that kind of focus for HP to succeed. 

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