The Cloud

HP CFO Acknowledges Supply Chain Woes

Finance chief Kathie Lesjak cites last year’s Thailand floods, which created a shortage of hard-drive disks.
David RosenbaumFebruary 23, 2012

In its quarterly earnings report yesterday, Hewlett-Packard announced that sales of personal computers fell 15% year over year; consumer sales fell 25%, and corporate PC sales fell 7%, all contributing to a 44% decline in profits. Overall revenues fell 7% to $30 billion, which was below expectations.

It was, Meg Whitman said simply in her first quarterly earnings call as HP’s CEO, “a tough quarter.”

On the call, both Whitman and HP CFO Kathie Lesjak repeatedly referenced last year’s Thailand floods, which created a shortage of hard-drive disks that led to a 30% imbalance between supply and demand in HP’s PC business and also affected its server sales — forcing the company, said Lesjak, to ship a “less richly configured product.”

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Lesjak said she expected the supply of hard drives to remain constrained in the second quarter, putting pressure on HP’s supply chain, which, Whitman admitted, needed to get better at moving from order to delivery. While saying she believed HP was “world class” in procurement, Whitman allowed that the company needed to improve its supply-chain execution.

More bad news was reported for HP’s Imaging and Printing Group (IPG), which Whitman called the company’s “lifeblood.” Overall, IPG sales declined 7%, with operating margins down 3% from 2011. Consumer printer hardware sales fell 15% compared with the same quarter last year, and Whitman said HP had much work to do to capitalize on the analog-to-digital trend.

All these hits to HP’s hardware businesses were not offset by its modest gains in services (revenue grew 1%) and software (software sales were up 30%, with most of that attributed to the company’s August 2011 $10 billion acquisition of cloud enterprise search company Autonomy).

But gains are better than losses. Indeed, it could be said that former HP chief executive Leo Apotheker, who was replaced by Whitman last fall shortly after he proposed selling off the company’s PC business, was right in trying to position HP as a software-and-services company rather than a hardware company.

To be sure, Whitman affirmed HP’s commitment to its printing and imaging business — and proposed that what the company really needed to do to right the ship was to remove complexity and integrate silos to reduce operating costs. But she also said HP needed to “own” the cloud, security, and information-management businesses.

Lesjak was enthusiastic about HP’s software revenue growth, called the increase in leads in the software sales pipeline “compelling,” and attributed the uninspiring increase in services revenue to the fact that contract renewals tend to come in at a lower price.

HP, said Lesjak, “needs to be nimble to take costs out to offset price reductions in renewals and sell new services.” She expected service margins to continue trending lower in the second quarter of 2012. But, as she told CFO in an exclusive interview last month, she sees cloud computing bursting out, as CFOs become more comfortable with cloud security and the cloud computing business model.

Both Whitman and Lesjak pleaded for patience, with Whitman saying her first order of business was to grow revenue by gaining share in all markets. She noted the universal decline in unit prices in the technology space, saying that therefore HP needed to sell more. It would, she cautioned, take time. Turnarounds, she said, are not quick, and she indicated a horizon of between three and five years.

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