Perfect storm slams into HP

Analysts say new CEO Whitman must lead effort to rebuild after management snafus, poor economy lead to dismal Q1 results

A bad global economy, poor market conditions and confusing management moves combined to create a perfect storm that slammed into Hewlett-Packard and staggered the PC maker in its first fiscal 2012 quarter.

HP this week said its profit plunged 44% in the quarter ended Jan. 31 as consumer and business PC and printer sales slumped significantly.

Industry analysts say it's going to take significant work and market maneuvering for one of the world's biggest PC makers to get back on track.

"I think this is a case of a company 'growing up in public" rather than blowing up in public," said Charles King, an analyst with Pund-IT.

"In essence, HP and its executives are attempting to manage a very disruptive transition -- some elements by choice and others imposed by the mistakes of previous company managers -- during the largest global financial meltdown in a couple of generations. By definition, the process is difficult and the results are bound to be messy." King added.

Dan Olds, an analyst at Gabriel Consulting Group, agreed that a lot of factors, including some caused by the company itself, combined to leave HP in a difficult position.

"This is the quarter when bad management decisions of the past and market conditions combined to smite HP upside the head, or, more accurately, in the wallet," Olds said.

"While a fair bit of HP's earnings shortfall can be blamed on external conditions like the worldwide recession and the drive shortage caused by the Thailand floods, poor HP management moves certainly played into this as well," he said. "Just a glance back at the last year tells the tale."

Former CEO Leo Apotheker prompted a lot of tumult and confusion last August when he announced that HP was considering the sale of its PC manufacturing business.

Though the company later decided to hold onto the PC business, a lot of damage had been done.

Consumers and major corporate buyers were left wondering if they should forgo buying from HP, while rival PC makers, like Dell and Lenovo were reinvigorated.

"The uncertainty made HP look indecisive and likely killed off a bunch of PC business in the last half of the year," said Olds.

"This happened at a time when PC revenues were being pressured anyway because of tablets and smarter smartphones," he added. "The hiring of Apotheker, a committed software guy who really didn't seem to have much of a feel for running a diversified hardware company, also didn't do much good. Firing him in less than a year was the right thing to do, but they're going to take some lumps as they unwind his missteps and build up their reputation again."

HP is looking at a long rebuilding road, according to Crawford Del Prete, an analyst with IDC.

"HP is taking on a significant turnaround," he noted.

"Today they depend too much on commodity hardware and low-margin services. Over time, they need to add software and higher-value services for the enterprise that will increase margins. This transition will take a long time -- measured in years -- and will require strong leadership. Meg [Whitman] can do this, but it will be difficult," Del Prete said.

New HP CEO Whitman needs to clarify to consumers and the lucrative enterprise market exactly where HP stands and what they can expect from the company in the future, said Patrick Moorhead, an analyst at Moor Insights & Strategy.

"They have decided to stay in the PC market," he said. "So now is the time to step up. HP's history of recent failures in smartphones and tablets has made them timid and gun shy in trying new things.

"HP needs to get back to rewarding employees and business units for innovating," Moorhead added. "Long-time HPers want to do this as it's in their DNA."

HP's sheer size and complexity will make righting the HP ship difficult, so Whitman and her executive staff will have to show a lot of resolve.

"Meg needs to realize that you can't be half in when it comes to the PC market," said Moorhead.

"You are all in or you aren't a player. Lenovo, Acer and Asus are happy to be in the PC market that HP denigrated during the [Apotheker] era. HP needs to play to win or get out of the market."

Sharon Gaudin covers the Internet and Web 2.0, emerging technologies, and desktop and laptop chips for Computerworld. Follow Sharon on Twitter at @sgaudin, or subscribe to Sharon's RSS feed . Her e-mail address is sgaudin@computerworld.com.

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