August 27, 2012
The Security of a Slenderizing Supplier
Over the last three business days, the world's investors and computer customers have watched results of a radical slenderizing program. Hewlett-Packard is taking its early steps on the treadmill to becoming a leaner provider. Its most radical move just resulted in shedding all of its profits for the quarter that ended in July. HP's going to sweat out its extra weight, one 90-day period at a time.
This time around it was HP Services that forced Hewlett-Packard to drop pounds. The vendor had been eager to jump into lucrative outsourcing business since early in the previous decade. After the board of directors killed off Carly Fiorina's plan to acquire Price Waterhouse Cooper, a few years later EDS became a part of HP, at a price of $14 billion. Writing off $8 billion of that outsourcing business as lost goodwill just pushed HP's earnings into the red.
HP's numbers showed that it was the first time in more than a decade that HP put red ink on the bottom of its balance sheet. It was the largest loss HP ever recorded in a single quarter, and only the third in the company's history. But the $4 per share loss was a sign that HP's slenderizing is serious. Its CEO Meg Whitman has said the company needs to do less, in the hopes of doing what remains even better.
But you do want a leaner HP, if you're sticking with this vendor. You just don't want it to lose the muscle of enterprise computing, the datacenter tech business, while it gets smaller. Today HP's stock closed at $17.21. You have to go back more than nine years to find a close that's lower, back in the 2002-03 era when the business world was digging out from 9/11's disasters. HP's market cap has slimmed down to just 5 percent of Apple's, and 15 percent of IBM's.Enterprise numbers from that slenderizing quarter didn't look good. HP's efforts at selling HP-UX, Integrity or other vendor-proprietary products have been on a crash diet. Nothing is dropping faster at HP than sales of the Business Critical Server products, slimming down another 16 percent over the summertime. Despite moves like winning its lawsuit against Oracle to claw back database futures for Unix, or introducing the least-costly NonStop server ever, BCS isn't going to rebound. HP admits it while it talks about futures that include Intel Xeon chips for Unix's best features.
There's going to be some hungry quarters ahead for investors seeking profits off HP. The company has fully embraced the big-picture of its slenderizing by clinging to non-generally accepted accounting practices (non-GAAP) for its 2012 forecasts. There's billions in losses mounting up right now, about $2.55 per share over the year using GAAP results: that's everything that's really going on, and going overboard to reduce the weight of Good Ship HP. But HP's going to focus on the non-GAAP results and point at a $4.05 per share profit over the year.
How's that possible? The company is going to "exclude after-tax costs of approximately $1.80 per share, related primarily to the amortization and impairment of purchased intangible assets, restructuring charges and acquisition-related charges." That's reducing its workforce by eliminating experts in its Business Recovery support centers. That's writing off the value of things like EDS. That's swallowing losses in businesses where the recovery will never surface, like the tablet market that's sent HP's PC growth reeling backwards.
These are single-time events. HP's doing the purge of its businesses which aren't profitable, but that doesn't include consumer products yet. Not as long as ink remains the highest profit item in HP's lineup. There's security in seeing a company slim down to a competitive weight, so it can battle for datacenter dollars in midsize companies. HP's not showing enough of that security yet. The things it's doing well are not always a match for what a classic, datacenter-based customer of that midsize needs.
When you look at our performance during the quarter, there were things that we did well and there were things that we could have done better. Looking at the positives for the quarter, Storage, Networking, IPG and Hyperscale servers delivered solid results.
Whitman's comments last week referred to Hyperscale, a product line that elates customers like Facebook, but doesn't have much connection with a $100-$500 million manufacturer of goods or processes. That's your typical HP 3000 customer. The Storage and Networking successes are muscle to power the bones of a datacenter design. Those IPG improvements are in printers, HP's one consumer business still showing a little growth.
The numbers from Q3 showed "the largest quarterly loss in HP's 73-year history. It will be only the second quarterly loss that HP has suffered during the past 15 years — a mostly rocky stretch for the Silicon Valley pioneer," according to AP business writer Peter Svensson
If you're keeping score, you can count back 13 years to mark the arrival of the first outside hire to lead HP's boardroom, Carly Fiorina. The decisions since then have been designed to make HP the biggest gainer of businesses, rather than business. Now the company is lopping off segments that either stopped producing profits, or never did.
Fifteen years ago HP still operated vendor-specific businesses like PA-RISC servers, MPE, its own Unix and more proprietary tech for the enterprise. It did it at a profit, rather than purchasing customers. Any reducing plan will be fraught with moments where a dieter is hungry but needs real nourishment, instead of the empty calories of a Big Data vendor like Autonomy.
HP can't hope to maintain the number of large servers it sells. Improved efficiency of servers will work against the vendor's revenues, but they can make that leaner HP stronger for its datacenter customers. There's security in knowing that your core purchases are the sales goal of your biggest vendor. You need to buy what they're eager to sell. If that's not coming to pass at HP, then the magic and mystery of cloud computing -- a product so slim you can't even see the servers -- is next on the enteprise diet.
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