HP's Turnaround: It's Time To Believe

Not only does CEO Meg Whitman seem to have a solid strategy, but there's plenty of evidence it's starting to work. Maybe it's time for skeptics like me to admit we're wrong.

Kurt Marko

June 17, 2013

5 Min Read
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The last few years for HP have been some of the most tumultuous for any major corporation in recent memory not named Enron. HP's era of strife includes six CEOs in the last 12 years, several five-figure layoffs during the same period, multibillion-dollar write-downs and a stock price that dropped to fire sale levels last November. It was easy--nay, natural--to assume the company would follow the path of its acquired properties--DEC, Compaq and 3Com--and be sold outright or broken up for parts.

But it turns out last November's confluence of bad news--an underperforming earnings report and the accompanying massive $8.8 billion write-down on the value of its ill-advised Autonomy acquisition--was the nadir of HP's fortunes. The company has since slowly but surely been grinding away at CEO Meg Whitman's five-year HP turnaround strategy to produce what she characterizes as HP's strongest product lineup in 20 years.

It's become clear that Whitman's plan wasn't just a stall tactic to bulk up her bank account. Unlike her predecessor, Leo Apotheker, who was tickled to finally get a job running a tech giant like HP, Whitman didn't need the money nor the headaches of righting a sinking ship like HP. She was already a billionaire from her days at eBay and had nothing left to prove. But she was on HP's board, and thus bore some responsibility for the mess left by Apotheker and his predecessor Mark Hurd's short-term, quarterly numbers focus and scandalous exit. Whitman had been around Silicon Valley long enough to venerate HP's traditions and reputation, and clearly didn't want to see it end like this. Unlike certain recent holders of her position, she valued HP as an institution capable of producing great products that improved the lives and profitability of its customers, not just as a path to fame, fortune and power.

The cynics among us--particularly old HP hats like me (full disclosure: I worked at HP for over 17 years, leaving more than seven years ago) who remember the days of Bill, Dave and their protégés like John Young--took Whitman's early pronouncements as so much lip service. We'd been burned by former CEO Carly Fiorini's rechristening of the HP brand as "Invent," only to see it end up as a hollow slogan and not a recommitment to product and engineering excellence. But Whitman has since had time to prove the skeptics wrong.

Last year was the painful part of her five-year strategy. In retrospect, it's clear Whitman's year-one tactic was to clean up HP's messy balance sheet and cost structure, including taking a realistic assessment of recent acquisitions, which resulted in the painful Autonomy and EDS write-downs. Another dose of pain was initiating almost 30,000 layoffs from an employee base that had bloated to nearly 400,000 after so many large buyouts.

This year starts the gain from all that pain. From a balance sheet characterized as "a mess" by one analyst who valued the company at a negative$2 per share last fall, HP has roared back. The result is an HP that saw its cash from operations increase 44% to $3.6 billion in its second quarter of 2013 while reducing its debt almost 40%. While cleaning up the finances to make Wall Street happy, Whitman was simultaneously repositioning HP to take advantage of the tumultuous changes upsetting the consumer and enterprise technology markets.

Indeed, as HP board member, noted venture capitalist and Internet luminary Marc Andreessen recently told CNBC, Whitman "has been emphasizing products much more, like Moonshot. She has more stuff out of the labs, more products under development. I think HP has more new products under development than it has at any point in its history." He even called Whitman HP's best CEO since the founders.

Next Page: HP's TransformationOn the consumer side, Whitman's strategy means implementing and sticking with a plan for the post-PC world (no abortive Palm tablets this time). Whitman told CNBC in a May interview after HP's last quarterly earnings report that the crux of HP's client strategy is diversification: "What we're going to do is basically segment the market and create the right product for that market at the right price. Sometimes that requires Android and an ARM chip set, sometimes that requires Windows and an Intel chip, depending on the market segment, but this is the new world order." If this sounds a bit like Apple (right device for the right segment; phones, tablets, laptops, hybrids), it is. However, unlike Samsung, HP has the depth, breadth and business relationships to actually become the Apple alternative.

While the client side of HP's transformation is still in the design and prototyping phase, the enterprise side of its comeback campaign is making strides with HP leading the pack toward a new era of hyperscale and software-abstracted (defined) hardware. As we reported, HP's microserver, Moonshot, is packed with innovations like high-density cartridges that can support a variety of compute, network, graphics and storage nodes and integrated communications fabrics, including a high-speed 2D torus mesh between server cartridges. It's an engineering tour de force that could, in Whitman's words, "mark the beginning of a new style of IT that will change the infrastructure economics and lay the foundation for the next 20 billion [connected] devices."

But HP isn't stopping at re-engineering servers. At last month's Interop, the company showed off perhaps the deepest SDN/Open Flow product portfolio of the show (described in Network Computing's SDN comparison). At its recent customer/partner event, HP Discover, the company unveiled new SDS features in the StoreOnce Virtual Storage Appliance and a flash storage system delivering 550K input/output operations per second with sub-millisecond latency.

The upshot is that HP is finally on the offensive, tackling the combined challenges of a declining PC market, cloud-scale infrastructure and software-abstracted application resources. Meanwhile, its most direct competitor, Dell, is in retreat, slashing margins to desperately retain PC market share and simultaneously seeking to hide from public scrutiny by going private. While HP's resurgence could prove disastrous for Dell (and uncomfortable for the likes of Cisco, IBM and Oracle), it can only be a good thing for enterprise IT as it increases competition and innovation.

HP still has plenty of challenges ahead: delivering a suite of compelling mobile products, managing declines in its PC and printer businesses, convincing IT buyers that microservers make business sense, and providing a cloud service portfolio that can rival Amazon's depth. But unlike a year or two ago, the HP of 2013 looks ready to attack the future, not cling to its past.

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