Will HP be able to restore its glory?
Madhuchhanda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
HP’s (NYSE: HPQ) shares plunged to a nine-year low recently after chief executive Meg Whitman warned of an unexpectedly steep earnings slide in 2013, with revenue set to fall in every business division except software. With concerns growing about HP through the years, it seems that the technology giant has finally lost its way. Let us have look at its continued decline.
HP’s Glory Days
HP's Personal Systems Group (PSG) claims to be "one of the leading vendors of personal computers ("PCs") in the world based on unit volume shipped and annual revenue. For years, HP has produced and marketed its brand of enterprise management software. In 2008, HP released its supply chain emissions data — an industry first.
In September 2009, Newsweek ranked HP No.1 on its 2009 Green Rankings of America's 500 largest corporations. The company secured the position for its products, performances and amicable behavior with customers.
In November 2011, HP secured the 1st place (out of 15) in Greenpeace ranking (climbing up 3 places) with an increased score of 5.9 (up from 5.5).
With a sterling report as this, one would expect the company to be at the front of the race for supremacy. But things are far different. HP's business is under siege on almost every front, losing market share and facing declining margins. And analysts expect it to only worsen.
What happened to the Company?
If I had to give one single reason for HP’s dismal condition, I would blame Apotheker. Léo Apotheker's disastrous tenure as HP's CEO revealed a dysfunctional company struggling for direction after a decade of missteps and scandals. But in reality, it’s not so simple. HP’s decline has been a long time coming, and those who had paid attention could spot it a mile away.
In July 2008, HP revealed an extension to the initial one-year warranty covering a few of the affected computers, but leaving many more without the protection, despite research showing that these computers were also affected. There have been several small-claims lawsuits filed in several states, as well as suits filed in other countries.
It also faced a class-action lawsuit in 2009 over its i7 processor computers. The complainants stated that their systems locked up within 30 minutes of powering on, consistently. Even after being replaced with newer i7 systems, the lockups continued.
Profits in 2011were 19% lower than in the previous year. With $127 billion in sales last year and $7 billion in earnings, the trajectory is ominous.
The recent reports were the final blow. In recent years, HP has been at the center of many a fiasco. The Oracle vs SAP lawsuit and the subsequent PR fiasco, HP’s “fast-paced” restructuring that was doomed to failure and the antagonization of the board – are just a few to name. Even in the few months before Whitman became CEO, there was the costly failed launch of a tablet computer, a mortifying public waffling over whether to spin off the company's giant personal computer business!
Why HP can’t compete
Whitman’s appointment as CEO did offer a ray of hope, but with the company in this state, there is only so much she can do!
HP is barely innovating. The company didn't boast a single hit consumer product even as 67% of its revenue stemmed from hardware. Apple (NASDAQ: AAPL) had shown the riches awaiting those who invent hit devices. Even with the recent software problems and the messy lawsuits, Apple can remain on the top due to its innovations alone.
But there were no iPhones or iPads in HP's bland array of products. Where Apple is soaring with the sale of iPhone 5, HP can is struggling to make ends meet. And Apple is only one rival for HP.
The company HP dreamed of being, IBM (NYSE: IBM), had soared by taking a different tack: It dumped its PC business and focused on high-margin software and services. That prompted what is probably an apocryphal, but telling, anecdote among enterprise techies: Two visiting consultants are waiting for the elevator at a big company's headquarters. One is from HP, the other from IBM. The consultant from Big Blue pushes the up button to visit the CEO on the top floor. The HP man, by contrast, hits the down button to see the IT guy in the basement. The message was clear: IBM was consorting with kings while HP was on hands and knees, fixing the plumbing. It wasn't just a metaphor either: IBM's pretax profit margins, just under 20%, were more than double the 8.7% HP achieved in Hurd's last year.
With pressure on all sides, HP's stock price shed 10% in afternoon trading. The sell-off shoved HP's shares to their lowest level in nearly a decade. The stock has fallen by about 30% since the former CEO of eBay took over HP. The big disappointment is stemming from the fact that things are expected to get worse in fiscal 2013, RBC Capital Markets analyst Amit Daryanani notes. Management expects its 2013 earnings to fall by as much as 16%
Will the company be able to restore its glory?
Wall Street had hoped for quicker signs of progress on Whitman’s turnaround plan, which centers on transforming the former industry powerhouse into an enterprise computing corporation. Shares in HP, the largest US technology company by sales, dived as much as 11% in afternoon trading, marking the biggest single-day decline since August 2011.
But investors might need to wait a while before that happens.
At an annual HP presentation, Whitman, told investors that the company’s recovery will start to become visible only in fiscal 2014, when investments begin to pay off. “The company intends to revert back to being a growth story. However, in the near term, earnings will get more challenging before they get better.”
If we look at the current track record, it looks bad. But there is no reason to give up hope on HP. It may take some time, but I believe, the company really is on the road to recovery.
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