OVER THE PAST YEAR HP's financial results have been marred with news of a multi-billion dollar write-down but this time there was no hiding from the fact that sales were down across the board.
HP's latest financial results come as CEO Meg Whitman is trying to keep industry watchers believing that she can turn the company around, but the short term pain continues to suggest otherwise. Interestingly, Whitman referred to Android devices as a way of increasing HP's business by attracting new customers.
The problem for Whitman is that while she can blame a 20 percent drop in revenue from PC sales on a wider decline in PC demand, and perhaps even stretch the same lower demand for printing to account for the one percent drop in HP's printing division, every single HP business unit reported a decline in revenue. Perhaps most worrying of all is HP's apparent inability to grow its enterprise hardware and services division and its software business.
Whitman even made a reference to Dell's recent earnings, saying the firm has "cratered", but just as Dell is struggling to become a supplier of enterprise hardware and services, HP seems unable to reform an established enterprise products and services business into one that is growing. HP's Enterprise Group, which now includes the firm's former Business Critical Systems unit that sold Intel Itanium kit, reported sales down by 10 percent to $6.8bn, while its Enterprise Services Group saw sales fall by eight percent to $6bn.
One of the reasons why Dell, HP and just about every other firm wants to have an enterprise business is due to what Whitman and other CEOs like to call "stickiness". When HP flogs kit to enterprises there is an automatic lock-in as large firms find it difficult to jump to a new bit of hardware or software due to existing service agreements and user familiarity, regardless of whether there are better products or better deals available. This "stickiness" is not a feature of consumer electronics or PCs, where customers can change horses at relatively short notice.
That HP's enterprise sales are falling is not only bad for the short term but doesn't bode well for the mid-term either. What HP will need to figure out is whether dropping enterprise sales is merely part of lower expenditures by enterprises or existing and potential customers are going elsewhere, meaning it has to win them back, which might be a far from easy task.
Whitman's predecessor, Leo Apotheker, might be largely seen as having been a failure but his decision to focus on software wasn't altogether a bad one. After all HP's hardware business runs on wafer thin margins, but software and the services associated with software including provision and maintenance are extremely profitable and generate business even when less than stellar software products are involved - Microsoft's line of products being an obvious example.
Despite HP paying through the nose for Autonomy in a bid to boost its software products, HP's software business decreased by three percent in the second quarter to $941m. When regard to software, Whitman told analysts and reporters that Android will be one of the ways HP can attract new customers.
Whitman said, "If we have the right product and if the price is right, the channel still loves HP and they want to sell our products, whether it is small businesses, medium businesses or the enterprise and frankly, having Android here helps a lot. These $169 Slates helps cover an area of the market that we didn't have before."
If Whitman singles out low-cost Android devices as being a way of helping HP get into new markets, one has to wonder just how badly did her predecessors do by buying other software companies such as Palm, Autonomy and other smaller outfits. HP has always maintained that the technology it purchased from Palm would be used in other parts of its business but it is hard to see what, if anything, that might be that could not be done with Google's Android, an open source operating system that firms such as Samsung have taken and modified to generate billions in revenue.
What is clear from Whitman's comments is that on the software side, Microsoft's ability to drive sales through operating system refreshes has been greatly diminished, which means that Microsoft's bargaining power and influence have also been greatly diminished.
Whitman might well look at Android as a way to save its consumer business but the firm will need more than a popular low cost tablet to save its enterprise business. How HP will combat the growth of public cloud providers such as Amazon and Google in order to grow server sales is made even harder by the fact that the largest cloud vendors, who are also the largest consumers of servers, now design and build their own kit rather than buying servers made by Dell and HP.
HP's second quarter financial results aren't so much the bitter medicine that the firm needs to consume but rather a wake-up call that sales are declining in all areas of its business. If HP can stem the decline in the next two quarters, that will be seen by many as a victory for Whitman, and if she can lead HP to reverse its fortunes, it will be nothing short of a miracle. µ
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