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HP vows to get its R&D back on track

ESSN Q4 2011HP made the price very clear for its pullout of tablets and WebOS: 91 percent of its Q4 earnings evaporated, according to the quarterly analyst briefing delivered last night. But new CEO Meg Whitman says the company will be getting back on track to better profitability and growth in the year to come. Mergers & Acquisitions are off the menu for the next year -- unless something extraordinary comes by, under $1 billion, in the software sector.

Yes, even a CEO who's determined to turn HP back to its invention roots can have moments of distraction. For the most part, Whitman was clear on what the company needs to revive: Research & Development.

"If we're going to get out of big M&A, we're going to have to get our investment up in R&D," she said. HP posted sales numbers to beat analyst estimates, but the profits slid from $1.9 billion to $239 million during the period. HP booked about $1 billion more in revenues versus last year's final quarter, $32.1 billion (and $127 billion for the fiscal year). HP's Generally Accepted Accounting Practices (GAAP) results included $755 million in a "wind-down of the WebOS device business for supplier-related obligations and contra revenue associated with sales incentive programs." The consumer side troubles run deeper than a dumped product, though. Printer sales, the firewall of HP's business, have also started to decline.

Then there was also a charge against earnings listed as "Impairment of goodwill and purchased intangible assets," $855 million. That turns out to be costs "associated with the acquisition of Palm Inc. on July 1, 2010 recorded as a result of the decision... to wind down the webOS device business." Whitman said HP's own actions impaired it during a quarter where it also toyed with spinning out PCs and axed its CEO. "One third of our challenges in 2011 were HP-specific," she said. "I had customers tell me they thought we were getting out of the hardware business entirely."

Another third of the challenges were "the distraction factor," she said. "There was a lot of drama in 2011." There was also a lot of silence on the cash register for HP's Business Critical Systems. BCS sales were down 23 percent for the group selling Integrity servers and the HP-UX, VMS and NonStop environments. These were the systems weighing down the overall results of the Enterprise Servers, Storage and Networking Unit (click above for ESSN details.)

Those are not numbers that will spark Hewlett-Packard to launch a move of its HP-UX to Intel's other chipsets -- although that's just the kind of R&D that would fit Whitman's vision for the company.

"We cut out a lot of muscle in R&D," she said of a period she described as fiscal 2011, but analysts say reaches much farther back than that.

She said she's seen acquistions work to grow other companies, but the M&A mantra is going to be fading at HP. "We cannot rely on acquistions alone at HP. We have tremendous R&D capacity here."

R&D projects started now will not pay off in product before 2014, she admitted. It's just the nature of creating something internally instead of spending billions. Although she praised the just-closed Autonomy deal, an $11 billion venture. For the fiscal year, HP increased its long-term debt by about 50 percent, to $22 billion. HP is going to be repurchasing shares in the coming months, another sign of reorganization.

"We're building HP to last, to be great over the next decade," she said. "We just can't continue to run this company for the short term. We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution."