Arik Hesseldahl

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HP’s Turnaround Progress Slow but Sure, Says CEO Whitman

hp_logo_darkHewlett-Packard, the troubled computing giant that has been trying to turn itself around, reported its second quarter earnings a few minutes ago, and they’re a mixed bag: Better than expected on the bottom line, but weaker on the top. HP shares were rising by nearly 13 percent in early after-hours trading.

A conference call with analysts concluded just a little while ago. On it, CEO Meg Whitman and CFO Cathie Lesjak reiterated that the turnaround roadmap they outlined at a meeting last year is still going about as expected, and that it is and will remain a multi-year plan. They’ve focused a lot of energy on paying down HP’s debt and improving its operations while making the investments to inject new life into its products lines.

There were also questions about HP’s decision to avoid fighting Dell in the PC business over pricing. Dell has recently said it was getting aggressive in order to take share, while HP has apparently decided to hold on to its profit margins at the expense of sales volume.

It will also be worth listening for hints of and adjustments in the strategy and timing of the turnaround plan put in place by CEO Meg Whitman and outlined at last year’s analyst’s meeting.

Also, HP earlier today released a video with Whitman summarizing the highlights of the quarter’s results.

Here’s a partial transcript of the conference call.

2:06 pm: Joining the conference call in progress. Meg Whitman is speaking. She just said that Europe will continue to be challenging and that China is starting to slow down.

Meg says revenue run-off in Enterprise Services will be slower than expected and will affect overall revenue in 2014.

In the Enterprise Group: Converged infrastructure is the future. Also, the two server groups are being merged into one. Project Moonshot lost during the quarter, but it will “take time to ramp.” But she’s confident that it will work to HP’s advantage without cannibalizing the existing server business.

In networking, HP is a strong number two after Cisco Systems, and its switching revenue is as much as the next five competitors combined, she says.

In software, Autonomy is stabilizing, and Vertica is looking good. The business is “well positioned.” Autonomy landed All Nippon Airways as a customer.

Now she’s speaking about areas where HP’s performance needs to improve. PCs is an area where it needs to fight harder. In mainstream servers, HP suffered from the conditions of the market and was tripped up “by our own execution.”

In PCs, “We stepped away from many deals to protect our bottom line.”

One key difference between the first half of this year and the first half of last year was that the PC industry roared back to life after hard drive supplies were disrupted by the flooding in Thailand.

2:16 pm: Whitman: “Overall our turnaround made progress in the second quarter.”

Now CFO Cathie Lesjak is speaking, and she’s running through the numbers again.

“IT spending softened and the macro-environment clearly did not improve.”

Revenue in most geographic regions was all down.

Software was down some as the industry is shifting to SAAS, Lesjak says.

2:29 pm: Revenue was down in financial services.

Lesjak is now talking about capital allocation and the balance sheet: We delivered more than $5 billion in the first half of the year, which is ahead of our previous guidance. But we do not expect this pace to continue.

Outlook: We remain confident in our ability to manage our cost structure. We are still on track to achieve the savings we’ve planned, but some business units are using these savings.

Moonshot launch was very successful, but we are not pleased with performance of x86 server sales. Printing continues to perform well.

Generally Lesjak expects lower restructuring expenses. “We now expect 2013 free cash flow to be about $7.5 billion.”

2:35 pm: Now time for Q&A. First question is from Katy Huberty of Morgan Stanley. Do you still think you can get to revenue neutral in services?

Whitman: We are rebuilding ourselves amid some of the most profound changes to hit the technology industry in a generation. The slower run-off in revenue will hurt us, but if 3Par and other business units perform as we expect, we expect to grow in 2014, but there will still be headwinds.

Whitman talked about some options for capital allocations. She says it’s mostly going to be “returns based,” meaning a bias toward share buybacks and dividends, and not M&A activity.

Question from J.P. Morgan. Again about services. What is your confidence in the planned services leakage events happening in 2014? Can you still unwind these planned attrition events? Basically he’s asking if some ineffective service contracts will get fixed.

Whitman: There is some predictability coming that was not there in 2012. “The control of this business is feeling better than it did before.”

Whitman: “We are fixing a lot of the problems that are keeping HP from being great. … This takes time. This is an enormous organization.”

Question from Sanford Bernstein: Could you clarify your plan for balancing profitability vs. growth? What is the near to medium term focus on share or profitability?

Whitman: We’re here to set this company up for the long term. In ISS (industry standard servers) we did walk away from some deals that weren’t profitable. In terms of Technology Services, one big headwind was the attach rate of support to sales of Business Critical Services (BCS, a.k.a. the Itanium server business).

Lesjak: We may well be more aggressive in pricing on an industry standard server if we’re getting attached to TS. We’ll take a lower margin based on the complete picture, and the long-term outlook on the account.

Question from Shannon Cross. More color on currency effects. Also pricing on the printer front from the Japanese companies.

Lesjak: Currency is about a point to revenue. It had been two points. “HP is exposed to a whole basket of currencies, and we have different hedging strategies.”

2:49 pm: Lesjak: We think our cost savings in the second half are creating a war chest for our Japanese competitors.

Whitman: We’re going to use that opportunity to fight back. Our competitors are more cost competitive because of what has happened to the yen.

Whitman: “The days of ever-escalating IT budgets in government are over.”

3:03 pm: That’s it. Thanks for tuning in.

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik