HP: We will grow faster than IT
Profits still half of Big Blue
If you wanted to make the most profitable and the largest IT company in the world, you would probably not come up with anything that looked like either Hewlett-Packard or IBM. Both companies have historically had their strengths and weaknesses, but they are starting to look more like each other - and to talk more confidently about their profit prospects despite the economic meltdown.
Big Blue says that it can hit $9.70 per share earnings in 2009 (up from the $9.20 it was projecting earlier this year) and says that it can deliver $10 to $11 EPS in 2010. IBM has not been confident enough about the IT biz to put out revenue guidance for either 2009 or 2010. (When you can buy back all the shares you want, you can make those EPS numbers whatever you want. But then again, you can't buy Sun Microsystems and buy shares at the same time, as IBM has learned).
This week, it was HP's turn to try to dazzle Wall Street at its own securities analyst party, which it hosted on its Palo Alto home turf.
Mark Hurd, the company's president, chief executive officer, and chairman, opened up the day of presentations and numbers optimistically. "We feel that, in the end, that we are positioned to win," Hurd said, like this was a Pac 10-Big Ten college football match-up at the Rose Bowl. "I think HP's best days are ahead of it, and I mean that sincerely."
And in a theme that Hurd repeated again and again to a Wall Street crowd that didn't want prognostications presented to it in this way, he said that HP would outgrow the IT market, no matter what that market did.
"We will grow faster than the IT market, and I know I will get questions about how fast the market is going to grow," Hurd said, cutting off to the chase scene of the HP 2010 movie. "Whatever that answer is that is handed to us in 2010, we will grow faster than that answer and the company has operating leverage to improve its financial performance."
What Wall Street and HP's many competitors want to know - and what cannot be knowable - is what IT spending growth will look like in the rest of 2009 and through 2010. And then they want to know how HP plans to get a larger portion of that growth than its competitors. HP is planning for moderate growth in IT spending, slightly larger revenue, and profits commensurate with this while being hopeful that it can capture more sales while not spending too much money chasing deals that don't get done.
This is a kind of practical prognostication means Wall Street and the IT market researchers have to make their own predictions about IT spending. And as the past couple of years have shown, they are truly awful at this unless business is humming along at a steady state.
So rather than talk about revenues projections by product line, Hurd walked the assembled securities analyst multitudes through its own reckoning of the total addressable IT market that HP chasing between now and fiscal 2012, what kind of growth they are modeling for, and what kind of gross margins these markets yields. Overall, Hurd said that HP was taking on a $1.3 trillion global IT market, but that its products were thus far only targeted at about $800bn of that opportunity. (This has vastly expanded over the past decade, with the acquisitions of Compaq and EDS, obviously).
HP's internal analysts reckon that the PC business will represent about $290bn in sales in HP's fiscal 2012, which will end in October of that year. The company expects that revenues between fiscal 2009 and fiscal 2012 will grow between 5 and 6 percent, and gross margins will be in the range of 10 to 15 per cent. This is not a great business, unless you think of how many consumers and businesses that PC racket allows HP to have relationships with and how HP gets to leverage a vast IT supply chain for PCs in other businesses, such as servers, storage, and networking.