Saturday, May 21, 2011

What DO the numbers say?

Second quarter performance was mostly terrific, some might say -- so why did the stock crater? Some say Cathy Lesjak shouldn't have been so bullish earlier in the year, and that Leo Apotheker had to retract her forecast -- perhaps true. Note that what he said was "earnings of $5.00 vs earlier a $5.20 statement". People (or automated trading programs at least) ran for the door.

But consider, HP has always been strongest in 1st quarter, due to its shifted fiscal year, and it has never been a "fourth-quarter phenomenon company" in sharp contrast to IBM, for example. And the first quarter was $1.17, up 27% vs. a years ago, while this quarter at $1.05 was 15% ahead of a year ago. So, even if there were no rain clouds on the horizon, they've got a tall order ahead to get a second half of $2.98 vs a first half of $2.22. So, retrenching a bit makes all sorts of sense without invoking the shibboleth of "what Hurd did to gut things, that now must be restored" or the issues surrounding Japanese supplychain with the earthquake and subsequent disasters in that unfortunate nation.

More instructive to dig a bit deeper, in my view:

PCs -- this is the Achilles Heel, perhaps. The i-Pad is going gangbusters, have you heard? And HP's tablet entree is late, off-target, and ill-equipped to compete. So that game is probably lost for this round at least. Does it matter to PCs? Sure. And we now have 1Q and 2Q results. HP PCs, the leader in the world, is DOWN 12% in Q1, and DOWN 23% in Q2 for the consumer markets. Thank goodness Corporate America (and the world) like PCs (and cannot figure out yet how to make iPads useful for work rather than entertainment), so corporate PC sales are UP 11% in Q1, and a remarkable 13% in Q2. Overall, HP PSG performance (never mind the re-org structure) is more-or-less holding its own, down 5% overall in revenue, and down from 6,4% to 5.7% in net profit.

Is Dell the issue? Not really. Their total corporate growth for the identical time period, was 1%, vs. HP overall at 3%. They now get 30% of their business from the enterprise level of servers, storage, and services as well. They reported DOWN 7% for their consumer biz, so in that $3B segment, they lost less than HP.

The real question for consumer level stuff is whether HP really can play here at all. It has not been a historic strength; it is unlikely that the current holdings will burgeon again, and it is clear from hindsight that the vaunted HP R&D creativity has yielded next to nothing compared to, say, Apple (not to mention Sharp, Canon, Android, and other hardware/software folk). This ignores completely any question about Google, Facebook, Skype, LinkedIn, Amazon, etc. services.

Enterprise stuff, sans services. HP, first quarter was down 2%, but Q2 was up a very solid 15%, vs. Dell, up 5%. Hummn. Here the right comparision is IBM (or Oracle, Cisco, WHO?). This could become solid, esp. when combined with Software up 20+% at great margins, and Enterprise printing up 41% after a solid 33% in Q1. So, we'd have to give HP very high marks in this space -- it has growth, margins, and a big territory. If the i-Slate (sorry, I cannot get past the old name) works for this arena, it could be GOOD. Bear in mind that the i-Phone, for rounds 1, 2, 3 and now 4 have yet to challenge the RIM Blackberry. It is Android, not an Apple mentality that serves corporate requirements. So, stay tuned, but this is where HP action is.

Printing. My Gawd, this just keeps performing. Up 5% in Q2 after up 7% in Q1. Clearly, the enterprise growth rates are helping, but paper must not be dead yet.

Services. Up 2% with a 15.2% margin. Vs. down 2% with a 16.0% margin in Q1. This is the truer concern, rather than PSG. This MUST perform. And these growth rates are anemic. And IBM is thumping HP right now, not to mention a host of dedicated companies. And this is the group that has not yet perceived that the HP Way exists, c.f. the comments of Peter Hill in his Amazon review of our book or the blog post earlier today. So Apotheker has to address this if HP is to find this business of value. And when you factor in all of the Corporate Board members, it is laughable to imagine that their expertise is very appropriate to this side of the business (c.f. Tiernan Ray's rant in Barron's). The E-Bay model was hardly "corporate services" and that charitably would be the closest of anyone on the Board to this world. So Apotheker, to a significant degree, is going forward here without much hands-on guidance.

BUY -- SELL -- HOLD?

The good news is that HP is currently discounted in the marketplace pretty well, so if you weren't an owner, you might consider it now. But it will be a longer rather than shorter 'play' if we are reading this correctly.

who IS in charge?

Tiernan Ray has a provocative column today in Barron's, posing the question of who is really running HP today. Here's some of his heavy hitting: "WHAT I HEARD LAST WEEK, FROM SOURCES who would rather remain nameless, is that the board of heavy hitters think they know the strategy better than Apotheker and that there have been differences of personal style, if you will, between Apotheker and some members of the board."

"What might that mean? If two powerful venture capitalists, Lane and Andreessen, head up the board's technology vision, it's conceivable, some sources mused, that both individuals could be telling Apotheker, in effect, how he should spend investors' money, rather than that decision coming from Apotheker himself."

Ray goes further, mentioning Meg Whitman, one of the more interesting and arrogant CEOs in recent memory, renowned for her spotless record (actually spotty is a much better word, if you consider that the EBay board couldn't wait to undo her strategy when they helped her deplane. Then we all got to witness her maladroit run for Governor in a state which has gone completely soap opera).

Without getting deep into this discussion, which will doubtless unfold over the next few months, it bespeaks an interesting conundrum for Apotheker that link to the obvious issues inherited from the last fifteen years of CEOs from Platt to Firina and Hurd gutting R&D and contribution from "the bottom"

Apotheker was bold this week, proclaiming that he would accept shareholder dismay while he works to build the longer-term business, especially in the weakened services side. Shareholders heard him, punishing the stock price by 14% from ten days ago. Since the new estimates are that 45% of NYSE stock transactions are now held for nanoseconds in trading programs rather than months or years by traditional investors, this is not at all surprising. And HP stock increasingly, as with most on the Big Board, is held in institutional form, subject to the same slavish behavior of any herd mentality.

So, he's on a short string, vindicating the pundits and shareholders who were incensed when the draconian last guy (what was his name again?) ran things.

Must be a pretty hot seat.

Dead DEAD?

A fascinating week! First, let me acknowledge Peter Hill's critical Amazon review posted last week. He takes strong issue with our HP book -- which he bought hopeful to "motivate me to think better of the company I work for." He's been at HP two years, coming via the EDS acquisition. His conclusion about our book -- two stars out of five, pretty damning! -- is that "Something is definitely wrong at HP and this book sadly is not much help in finding out what. It's a nostalgic look that is probably really interesting if you are 70 and remember working at HP in the sixties."

And yes, I agree with him when he paraphrases our opening "the HP Way is dead, Dead, DEAD" and he adds that "it's been dead for twenty years". I couldn't agree more. I left the company 20 years ago for that very reason.

Furthermore, I agree with him when he writes "you'd be better off to read the gossip columns about the Mark Hurd dismissal". The fact that we contributed heavily to those gossip columns -- I was the first one, and the only one in the worldwide press for 72 hours -- to pronounce that guy the thug that he was (and is), aptly caught in Hill's quote "the greed of the executive tier and the manipulative bunch of silicon valley insiders responsible for the acquisition bloat that is HP today."

If Hill were to review this three year running blog about HP, he might find more relevant material re "today's HP" than in our avowedly "strategic history book" about HP. My guess is that Peter is struggling with whether he is at the wrong company, or the right company at the wrong time -- just "reading between the lines"

But his question and extended critique begs a serious answer. Bianco's book "The Big Lie" about Hurd's corrupt leadership comes at it for an individual, at this one company. But the book that takes on Corporate America, not just greedy HP leaders or even Silicon Valley insiders, has yet to be written. That book would have to include Mike Cassidy's column when Paul Baran died, where he opined that Baran was a relic of 'the old days' in silicon valley, before "business bullies and braggarts" took over.

I call it "The Broken Dream: Wall Street vs. Main Street" (copyrighted here first). Such a book would analyze just when it was that Venture Capital, the nation's Business Schools, and Wall Street conspired, albeit loosely, to decide that Charlie Wilson at GM 58 years ago was wrong when he said "what's good for GM is good for he country." Now the thesis instead seems to be "what's good for (insert your favorite company name here) is good for the shareholders" while leaving unsaid the rest of the sentence -- "and to hell with the employees and the local community". The HP of which we wrote believed that shareholders were pnly one of four major constituencies to be served, and executives at the company were not even one of the four. Back then, employee contributions to local civic affairs was expected in both time and resources; employee satisfaction and enthusiasm were important, even vital. Outsourcing would have been anathema, even as intellectual contribution around the globe was celebrated.

That book would be more relevant, but it would be a depressing book to have to report that not only HP, but Intel, Cisco, Oracle, Microsoft, IBM, and practically any other of our 'revered' high tech giants of yesteryear have the same disease. Not to mention Citibank, Merrill Lynch, WalMart, Motorola, DuPont, Xerox, any car company of rank, the oil companies, AIG, Boeing, Kodak, and other "household brands" We've broken the bond, and this, more than sagging K-12 math scores, is killing America.

Not sure that such a book would be very popular, certainly not in leadership halls.