"Today, HP announced first quarter results amid one of most difficult economic downturns that any of us has ever faced. I am proud to say that we continue to execute well in this very challenging environment."
So began Mark Hurd's recent letter to Hewlett-Packard's employees. Hurd, who has earned a justifiable reputation for straight talk, did not mince words. Like every other tech company these days, he explained, HP is feeling the impact of slowing global demand for IT products.
In black and white, here's what happened in HP's first fiscal quarter:
Personal System Group revenue down 19%
Imaging and Printing group revenue down 19%.
Enterprise Storage and Server revenue down 18%.
That's why Hurd ordered up an across-the-board pay cut, starting with the boss--he's taking a 20 percent salary reduction. Other execs are taking a 10 percent haircut, while the base pay for all other exempt employees will be reduced 5 percent. HP also announced changes to its U.S. 401(k) plan as well as its share ownership plan.
Tough news to deliver, but no CEO has yet been able to repeal the business cycle. The one upbeat tale to tell was in the services group, which accounted for more operating profit than any other segment of HP's business. In his note to employees, Hurd even likened HP to two different companies. Hyperbole? To be sure, but it's not that much of a stretch, really. There's a lot of experimentation going on in the IT world as companies struggle with how to make do with less. One increasingly pronounced trend: more IT departments are shifting their computing functions to the cloud. That means money in the bank for the services that can speed the transition.
Good enough. But if HP's going to weather this "econo-lypse," then services will have to grow even faster--and that's going to test even Hurd's formidable managerial talents.
After Carly Fiorina flamed out as CEO, Hurd stepped in and effectively refocused a company that was foundering. The timing of his arrival was propitious as it also coincided with a global IT boom. With the Dow heading for new records seemingly each month, what did it matter that HP still relied on a low-margin, commodity hardware business?
That seems like an eternity ago. The good times are over for now and the latest IDC report does not offer encouragement about near-term prospects for companies in the hardware business. Of course, Hurd still can count on services, but that's where HP squares off against IBM, which competes with a much deeper (and larger) bench. (Also, it appears that Big Blue is not feeling the same pain as HP. In an 8K filing on Thursday, the company confirmed its guidance for the year.)
Both HP and IBM have their strengths in services, but as Roger Kay writes, "for too long observers have been treating them like peas in a pod when, in fact, in many ways they are night and day."
Under Lou Gerstner and now Sam Palmisano, IBM moved away from commodity businesses like personal computers and recast itself as a heavy-duty supplier of myriad services to IT customers. In its conversations with prospective customers, IBM never fails to draw the (invidious) comparison with HP, which it depicts as the relative newbie.
OK, all's fair in love, war, and marketing, but there's more than a grain of truth in a PR pitch. Charles King, of Pund-IT Inc., who writes an insightful newsletter on IT trends, puts a magnifying glass on the recent earnings reports turned in by IBM and HP. And he finds that the usual apples-to-apples comparisons between the two companies' services businesses is a flawed one.
There was a point a decade or so ago when side-by-side comparisons of the pair was reasonable. In the 1990s, system vendors including IBM and HP pursued "desktop to datacenter" strategies that included everything from PCs and workstations to enterprise-class servers and storage products. But since 2000, system vendors including IBM and HP have pursued highly individualistic paths that diverged significantly from that tradition.
By the numbers, IBM has become a company focused on the computing needs of businesses of every size, with the majority of revenues coming from enterprise services engagements bolstered by deep software and hardware portfolios. By contrast, the majority of HP's revenues come, as they have for years, from highly commoditized printer, PC and notebook products.
That was a prime reason behind HP's acquisition of EDS, which King correctly notes now accounts for a big part of HP's profits.The challenge is that "the size of HP's software revenues (less than 1/7 of IBM's) punctuates the stark differences existing between the pair."
Hurd obviously doesn't need me or any other outsider to remind him how his company's services arm stacks up against the competition. He knows his company has got to step up its game.
But in the absence of a U-shaped economic recovery--and few economists predict that--the pressure is on to give IBM a run for the money (literally) in an area where profit margins are still great. If Hurd is the superstar executive that his press clippings suggest, he'll do whatever is necessary to make sure HP gets its fair share. At this point, he doesn't have much choice.