Arik Hesseldahl

Recent Posts by Arik Hesseldahl

HP’s Fix-and-Rebuild Process Is Progressing but Not Complete, CEO Whitman Says

meg_whitman_apjWhat a difference a year makes. Last June, the technology giant Hewlett-Packard convened its annual HP Discover event in Las Vegas with a new CEO, Meg Whitman, who had been on the job only eight months. Reasonable people were wondering out loud whether one of America’s great technology companies could survive the combination of an intensely competitive marketplace for both consumer-oriented and enterprise-oriented technology products.

In a way, the challenges only got worse. HP leads the world in three declining markets — personal computers, printing and enterprise servers — and is rushing to build new businesses to replace sales lost from those declines. And while the challenges facing HP are getting bigger, Whitman seems more confident and cool-headed than a year ago.

Whitman has said that 2013 is to be the “fix and rebuild” year, during which the broken bits of HP — there were and still are many — would be remade in such a way that they can begin to deliver growth in 2014.

Investors seem to like what they see. HP shares are up by more than 14 percent versus a year ago. HP shares closed Monday at $24.49. But that doesn’t reflect how bad the optics on HP got at their worst. As recently as late November, HP shares traded as low as $11.71, making the recent 109 percent improvement look all the more muscular. Time will tell if it can stick, and HP’s next quarterly earnings report, on August 13, will be seen as a crucial indicator that the turnaround strategy Whitman has instituted is truly taking hold.

I sat down with Whitman yesterday in a meeting room at the Venetian Hotel in Las Vegas, shortly after she had completed a run-through of the keynote address she’ll be delivering later today. My first question was about the state of the “fix and rebuild” process.

AllThingsD: Meg, it’s now roughly halfway through a year that you’ve described for HP as the “fix and rebuild” year. What’s fixed and rebuilt? What remains to be fixed and rebuilt?

Whitman: I think what is fixed, or well on is way to being fixed, is the balance sheet and the cash flow generation potential of this company. In large part, the ability to do better than we said we would do explains a lot of the run in the stock price. And so the balance sheet is repaired, which is a big deal in a turnaround. I would say our core mission and the ability to execute against that mission is well in hand. I think our go-to-market motion is not as smooth as I would like it to be. We are commercializing innovation much faster than we did. One big change for the positive is that we’re promoting people from within. When I came in, 65 percent of our directors and above were outside hires. Now it’s the reverse. And the benefit of promoting from within is enormous, because people don’t have to learn the business. They already know how HP does things. And then, of course, there’s the big financial metric. We have to grow revenues. We’ve got to get to net positive growth for the company overall.

And that I think is the great metaphysical challenge for HP. And yet you have to grow at a moment when HP leads the world in a series of declining businesses: PCs, printing and servers. Let’s tackle the PC business first: How do you grow revenue in a marketplace that’s seeing such historic declines?

Within that personal systems group, of which PCs are the biggest share of revenue, a large part of our ability to grow revenue is affected by how fast the marketplace declines. I think that eventually the decline will begin to slow down. There are 140 million devices out there that are more than four years old. There’s still a lot of machines running Windows XP that are due for an upgrade. So I think the decline will slow down, but we’re moving as fast as we can to tablets, hybrids, multi-OS, multi-architecture, multi-form-factor. And how long that transition will take depends a lot on how precipitous the decline in PCs continues to be.

Are the profit margins better on these tablets and hybrids than they are on traditional PCs?

The margins aren’t as good, but they have a better attach rate. So, for example, when someone buys a tablet, they usually also buy a keyboard, or Beats Audio headphones, and the services around security, warranties. The attach rate for those is actually higher than it is for traditional PCs, but on the core hardware platform, the gross margin dollars are a bit less, but the percentage is less, as well.

Meanwhile, your competitors — and in this case, I’m thinking about Dell — are getting really aggressive in every market segment. How are you going respond to that?

We have to be really smart. We have to segment the market and decide where we want to play and where we want to win, and let the others go if there’s crazy pricing. And so we have to be very smart about market segment, customer segment and country. We have to make bets, because we can’t follow Dell all the way down, because it’s bad for HP. We have to decide where we need to protect and where we need to attack. And we obviously have to work on our cost structure, as we do every day in this industry.

How’s the search for the new chairman going?

It’s been very interesting. We’ve had a lot of interest from very well known executives. I think they sense that the era of uncertainty at HP is over. Perhaps the worst is over, so they’re happy to entertain joining the board. We’re going to announce a number of new directors over the fairly short term. In the end, we’ll be looking for four or five board members over the next 12 months, and we’ll probably announce two, or maybe a few, sooner than that. And we’re also looking for the next chairman.

Back to the point about the company’s debt. When you reach your goal of having a net debt position of zero, what happens then? Will you start considering acquisitions again?

So then we’re in the happy position of having to talk about a capital allocation strategy for HP. We’ll consider increasing the dividend and buying back more shares. But we’ll also consider getting back in the acquisition business. Big technology companies, we do need to make strategic acquisitions that help in one particular area of our business. And so I think there would be small to medium tuck-in acquisitions that we might do. Not transformational acquisitions, because we’re in the businesses that we’re in, but which further the businesses that we’re already in.

Obviously, we’re not talking about acquisitions this year, but given its history, especially Autonomy, having seen how deals like that can go wrong, what will guide you as you consider making your next acquisitions, whenever that happens?

I think it’s the same guidance that every big company should follow. It’s a question of what you’re trying to accomplish strategically, and what you’re willing to pay. Given what happened with Autonomy, the next acquisition that we do, even if it’s teeny, will be the most scrutinized acquisition, so we have to be thoughtful about it.

What will you be talking about in your keynote?

I’m going to talk about our progress over the last 12 months since Discover last year, and talk about how our objective is to provide solutions for the new style of IT. But, perhaps more importantly, to be the best possible partner to those CIOs who are under immense pressure.

What are you hearing from customers right now? I’m guessing they had a litany of concerns last year. Are they more positive than negative?

I’d say I’m hearing more positive than negative. I would say that the list of thing they’re concerned about is shorter now than it was last year. When I first came in, they had many concerns and challenges with HP, and they’ve seen us set them up and knock them down repeatedly. We still have work to do. I think we’ve made huge progress in being that customer-centric company that is a huge part of HP’s DNA. I still hear about challenges, but by and large what I hear is measurably better than 18 months or a year ago.

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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