What Many People Are Missing About HP

On October 3, HP held their Securities Analyst Meeting, which I attended in person at the Concourse Exhibition Center in San Francisco. This is a day, like all major public companies have, where senior management discusses their plans for the future with the major institutional investors. Based upon the reduced stock price afterwards, the message didn’t please financial analysts, and the stock price that day was reduced. I heard the same content as everyone else and some of it wasn’t pretty, but I also think people missed a lot, too.
I am an industry analyst, not a financial analyst, which means I am looking at companies, products, and technologies through a different lens. A spreadsheet isn’t my primary lens, it’s nearly 25 year’s experience of watching the relationships between buyers, the products, the technologies and the companies who deliver them. Through that lens, I saw the following.
Openness, Honesty, Humility


I have sat through more corporate presentations than I can even count. Most of them involve mountains of industry jargon, big flowery words, and a complete denial that challenges exist. Big business has become a culture of spin, and therefore these kinds of meeting provide a lot of that. I can’t blame them as financial analysts bite on negativity like a dog biting onto a towel, never letting go for an eternity.
While HP’s presentations sometime contained some corporate-speak, they provided an honest assessment of where the company is, where it came from, and where it is going. When HP didn’t know exactly the answer, they said it straight and didn’t spin it. Whitman was criticized a bit for talking about prior regimes as part of the issue, but the fact is that having that many CEOs in that short of time, 7 CEOs in as many years, does create utter chaos. If you have ever actually worked in a large F50 corporation, you would know that. I have never seen this level of honesty from any company this size and I applaud HP for it. Others should too.
Forecasted $7B Profits for 2013
During the meeting, HP talked quantitatively and qualitatively about the present state of the businesses. They also talked about the future. For 2013 they forecasted $7b in profits, specifically $3.40- 3.60 EPS and also $5B in free cash flow. How does this compare to other companies? Here is a smattering of a few select companies’ latest annual profits:

Lenovo $0.273B	HP $7B
Dell $3.5B	Cisco $8B
EMC $2.5B	Oracle $10B
SAP $4.5B	Google $9.7B

While HP has a ways to go to catch up with IBM, many companies would kill for $7B in annual profits.
Impressive Share in Many Markets
Sure, HP has its challenges, but another big thing people fail to recognize is how successful HP is in so many markets when measured by market share. In most of its product markets, HP is #1 or #2 by revenue and/or market share, in servers, PCs, workstations, printers (laser and inkjet), software (quality, infrastructure & operations management, big data with Autonomy), and services lines of business such as storage.
Here is some data that comes straight out of HP’s SAM presentations and Q1/Q2 IDC:

Servers, Storage, Networking: #1 server vendor in shipments for 10+ consecutive years #1 x86 server vendor in revenue and units for 16+ consecutive years #1 x86 blade vendor in revenue and units for approximately six years #2 branded tape drives #4 external disk storage systems #2 in external storage revenue in EMEA #2 switch share WW in revenue at 11.5% and ports at 18.2% #1 switch share in China at over 30% revenue share #2 Ethernet switches share #3 wireless network revenue share #2 router revenue share

Software: #6th largest software company in the world #1 distributed systems management software #1 automated software quality #1 enterprise search and discovery #1 archiving PCs and Printers: #1 PC market share, including workstations #1 workstations #1 desktops #1 notebooks #1 laser printers #1 printer supplies #1 graphics printing #3 printing software and services

Absent in the SAM presentations were market share claims about enterprise services, but even without this, the share stature speaks for itself. HP is #1 or #2 share in a mind-boggling amount of markets.
HP Said it would Take 5 Years
In scanning the articles and financial analyst briefs after HP’s SAM, one thing I thought puzzling was the amount of people who were surprised that Whitman said it would take 5 years to turn around HP.

This couldn’t be any clearer: Big turnarounds take five years, and HP has four more years to go. Whitman has been perfectly consistent as of late. So why on earth was the street surprised at this?

To Believe in HP

HP has big issues that need addressed but is far from being unfixable, where some people stand. It’s easy to bet against HP, but it is a lot harder when you internalize they make billions in profit, are #1 in key markets like infrastructure, and yes, the macro market will turn around at some point. What will it take for more people to believe in HP? Some of HP’s detractor will need to see the second coming to believe and are unmovable. Many of these people’s view of HP are stuck in the past and will never more on. When HP does start to show traction, they will minimize it too.
The more reasonable people will measure HP on its long term plan and short term metrics toward that future. My firm, Moor Insights & Strategy would like to see more detail on how PC’s help with the overall enterprise play, the smartphone plan, and more details on efforts in public cloud as I believe it will be larger than even HP believes it is. In the meantime, people need to give HP some breathing room because it is only hindering their turnaround plan.
I’ve never seen a successful turnaround play without a decisive and charismatic CEO who is connected to the employee base. I think Whitman has provided some steadiness over the past year that HP has lacked since Mark Hurd was CEO, and this will continue and pay dividends over the few years. Just having a consistent strategy, and largely the right one strategically, and a committed exec team in place to drive it, will go a long way. Whitman has shown to be a good communicator and I give her credit for sticking to her guns by focusing on what it takes to make HP a great company for the next 50 years and not making decisions that make the street happy in 2012 at the expense of the long term.

First, anyone who has ever worked at a F50 company knows that this how long a turnaround takes. This is particularly true when there has been so much turmoil at the CEO and board level. Every new CEO starting with Carly Fiorina came in with a new vision and way of doing things. The new CEOs then chose different direct reports at the executive office to run staff and line functions. If you haven’t worked at a large company but are an NFL football fan, you can relate. How well does an NFL team take to win their division after the head coach and all the assistants get fired? With a few exceptions, it takes a long time.
The other puzzling thing was that Whitman had previously said it would take a long time. There are many examples where she said it would take a long time:

• At HP’s Discover partner conference, Whitman was quoted as saying “Most turnarounds in American industry are anywhere between four and five years.”
• During HP’s first quarter earnings call in February Whitman said: “It’s going to take us a little while to get out. And if you look at history, these turnarounds are not done in less than two years and often they take three or four or five years.”
• In a recent eWeek article, Whitman is quoted as saying, “We need to tell The Street HP’s story. We need to explain, business unit by business unit, what our strategy is, where the growth is going to come from, what the products or services or solutions are that we’re going to bet on, and how we’re going to drive those consistently over the next four to five years“
• Finally, in The New York Times, Whitman is quoted as saying, “Hewlett-Packard needs four more years to have confidence in itself.”