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Whitman says HP turnaround will not happen overnight

Fixing execution and cost cutting outlined as Q1 profits tumble

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Five months into the role as HP CEO, Meg Whitman is finally detailing the tech titan's turnaround plan that involves "fixing execution" and cutting costs to save cash before it ups investments in R&D.

In a tough fiscal first quarter, HP ironically saw an upturn in the software and to a much lesser extent the services businesses – the strategic areas of focus for Whitman's hapless predecessor – but declining sales across all core hardware divisions again.

Sales in the three months ended 31 January fell 7 per cent to $30bn, while operating and net profits sank 41 per cent and 44 per cent to $2bn and 1.46bn respectively.

"Frankly, it was a tough quarter, and every business had its challenges," said Whitman in a call with analysts last night.

In the Personal Systems Group, which HP decided not to spin off, revenues dropped more than 15 per cent to $8.8bn, with commercial down 7 per cent and consumer diving 25 per cent. Total units shipments fell 18 per cent.

"The fact is that for all that's right with PSG, we under-invested in innovation for the last several years, and we've been late to market too often. We have to lead again," said Whitman.

The Imaging and Printing unit filed a 7 per cent dip in revenues to $6.2bn, with HP saying it was "pressured on multiple fronts" and that sales from adjacent business such as commercial digital prints did not ramp up fast enough to replace sliding hardware sales.

Enterprise Servers, Storage and Networking (ESSN) revenues declined 10 per cent to $5bn: networking revenues were flat; Industry Standard Servers fell 11 per cent, Business Critical Servers dropped 27 per cent and storage was down 6 per cent.

Whitman described this segment as a "highly competitive environment that was compounded by the hard disk shortage. in our broader storage business, we're still working through a product transition".

So that leaves Software and Services, the units that were a core part of Apotheker's vision which were thrust into the foreground as he mulled over options for the future of the PC biz, killed of WebOS hardware and splashed the cash on Autonomy.

Services revenues hardly provided reasons for investors to cheer - sales grew one per cent to $8.5bn, with Technology Services turnover up 2 per cent, Application and Business Services flat and IT Outsourcing grew 2 per cent.

The Software division pushed up revenues by 30 per cent to $946m including numbers from Autonomy, fuelled by 12 per cent growth in licensing, 2 per cent growth in support sales and 108 per cent in services.

Whitman has been on a tour of duty since the own goals HP scored last summer, attending 80 customer visits in the US and Europe and meeting staff and channel partners.

"We've been working hard to set the right tone, calm the waters and reassure our stakeholders that HP is the same reliable company ... So what have I found? Certainly, I found some skepticism. But I have also found that we have incredible support."

She said HP is on the right trajectory "but we have a long road ahead of us" and its recovery plans are not helped by continued cautious spending in US commercial, weak demand in consumer and the challenges in Europe.

Whitman said the major issues to overcome include "fixing our execution" by reducing SKUs to remove supply chain complexities; upgrading sales tools and systems to react more quickly to punters; and upping sales productivity by "rationalising our go-to-market".

The second major hurdle has roots in the strategy devised by disgraced former CEO Mark Hurd, who slashed R&D. HP said its businesses were under "intense competitive pressure" and that it was feeling the strain from "tectonic [industry] shifts".

"We didn't make the investments we should have [made] during the past few years to stay ahead of customer expectations and market trends. As a result, we see eroding revenue and profits today. We need to invest now as a market leader from a position of strength."

The final issue pulled up by Whitman is how HP reacts to emerging "delivery, consumption and business model[s]" for tech areas including cloud, security and information management.

Whitman said there was a "once-in-a-generation" chance to define the future of tech – clearly she can still draw upon cliches learned in her brief political career – but she said HP needs to "stabilise financial performance" and generate profits to invest.

"And it's clear, from both our revenue and margin profile, that our current cost base just isn't affordable. On the current trajectory, we just won't have the capacity that we need to invest," she said.

"For years, we've been basically running our business in silos. And under that model, we built some of the leading franchises in technology, but it's also made us too complex and too slow," she said.

HP has been through years of pain with a series of redundancy programmes hitting morale, but more can be done to "streamline operations" such as tackling business processes by standardising and automating workloads.

"We can also take a ton of complexity out of the system, improve our effectiveness and significantly reduce costs," said Whitman.

"It's not easy work and it's not a quick fix, but it holds the potential to improve the way we operate and execute, and it simply has to be done. We have got to save to invest. We have got to save to grow ... I have no doubt that we'll turn HP around."

Turnaround strategies take time to bed in but with the founders' families and an incredibly political board to contend with, Whitman will be looking over her shoulder for some time yet. ®

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