AllThingsD » Meg Whitman

HP CEO Whitman Earned One Dollar Plus $16 Million in 2011

Arik Hesseldahl — Fri, 03 Feb 2012 15:27:02 +0000

Hewlett-Packard released its annual proxy statement this morning, which, among other things, gives a look at what its top five executives made last year. Here’s the rundown:

CEO Meg Whitman, who upon becoming CEO agreed to take an annual base salary of $1, received more than $16 million worth of stock awards. Add on another $372,598 in other compensation, and the total value of her package was north of $16.5 million. Much of that other compensation stemmed from the period when Whitman was a director on HP’s board, and before she was CEO.

Under her employment contract, Whitman received an option to purchase 1.9 million shares of HP stock at a strike price equal to the value of the share price on the date of the grant, and subject to vesting requirements over time. As of today, 1.9 million shares would be worth almost $55 million. Whitman, the filing says, was the only one among the company’s named executive officers to receive an options award during 2011.

The filing also shows that CFO Cathie Lesjak made a base salary of $825,000, plus $9.3 million in stock-based compensation, $679,000 in incentive pay and $101,500 in other compensation, for a total of more than $11 million.

Todd Bradley, executive vice president and head of the Personal Systems Group, the division that HP briefly considered spinning out last year, made a base salary of $850,000, plus $9.3 million in stock-based compensation. He received $464,457 in incentive pay, plus $105,000 in other compensation, for a total just shy of $10.7 million.

Vyomesh “VJ” Joshi, the executive president and head of the Imaging and Printing Group, got an $850,000 salary, too, and nearly $8 million in stock awards, plus $638,355 in incentive pay, for a total of $9.8 million.

Shane Robison, the former chief strategy officer who retired last year, received a base salary of $781,250, plus stock awards worth $7.6 million and $606,506 in incentive pay, for a total of $9 million.

Finally, we have a full accounting of what former CEO Léo Apotheker made for his 11 months of service at HP’s helm. The full amount was $30.4 million. The precise amount had been the subject of some guesswork based on less-than-complete HP filings made around the time of Apotheker’s departure. The filings netted for HP a dubious award for “Worst Footnote of the Year” over at Morningstar’s Footnoted blog. My best guess had been in the $28 million to $33 million range.

Apotheker’s compensation breaks down like so:

$1,152,770 in base salary.
A $6.4 million bonus, of which $4 million was a signing bonus when he joined HP, and $2.4 million paid under the terms of his separation agreement.
Stock awards worth $17,660,759.
$5.2 million in “other compensation.” Within that was $2.9 million in relocation expenses related to Apotheker’s move from France to California and back; $1.7 million in “miscellaneous,” the majority of which, as explained in a footnote, was a “reimbursement for foregone non-competition payments that would have otherwise been payable by his former employer,” which refers to the software company SAP, where Apotheker was co-CEO.
Another $25,000 representing his personal use of HP aircraft.

Add Another Log to the Fire: HP Employees Grumble About Loss of Stock Grants

Arik Hesseldahl — Tue, 24 Jan 2012 13:00:06 +0000

Given the events of the past 18 months or so — two new CEOs, a brief flirtation with a significant spinoff, the failure and then marginalization of an important consumer product and an unpopular and expensive acquisition — it’s probably no surprise that morale among employees at Hewlett-Packard has dropped significantly in recent months.

But now, many employees in HP’s mid-tier management ranks have something new to grumble about. Some 700 to 900 HP employees who have been participants in a three-year-old HP stock bonus plan learned right before the holidays that they would not be receiving the payout of shares they expected.

The program concerns what HP refers to as PRUs, or Performance-based Restricted Units, and is described in detail in HP’s 10-K and proxy filings with the Securities and Exchange Commission. It was created both as a performance-based bonus and also as a retention plan for certain HP management-level employees at the vice president level and higher.

In a Dec. 12 internal HP email obtained by AllThingsD, employees participating in the program were told that they wouldn’t be receiving a payout for 2011, and that shares accrued during HP’s fiscal years 2010 and 2009 would also be lost.

To explain:

Under the terms of the program, employees received grants representing hypothetical shares of HP stock that were to have been paid out at the end of the three-year period ending Oct. 31, 2011. Had HP met the stated cash flow and shareholder return goals, the shares would have been paid out to employees sometime in December.

Instead, employees were told that they would receive no payout from the PRU program at all, not for 2011, nor for 2010 or 2009.

This is, of course, exactly how the PRU program was to work: With HP’s goals not met, there was no payout to give. And while other equity-based bonuses and grant programs remain in force, for employees in the mid-level ranks — not those in the senior ranks already earning half-million-dollar salaries or more — PRUs represented an important benefit.

It’s not clear exactly how much HP would have been required to pay had the company met the PRU program’s requirements. The company’s most recent 10-K filing said that it had “$82 million of unrecognized pre-tax stock-based compensation expense related to PRUs with an assigned fair value,” but now that the payout has been canceled entirely, it no longer has to account for that amount, nor for any previous year’s PRUs.

Whatever the total amount involved, affected employees who stood to receive PRUs are seething about how and when they were told they wouldn’t be receiving them.

The email, delivered to certain managers on Dec. 12, contained instructions on talking with subordinates about their annual performance review and the rewards they could expect. The subject line was: “Deliver the One conversation.”

It reads, in part:

Managers with FY09 Performance-based Restrictued Unit (PRU) Award Holders

We have the final performance results for the FY09 Performance-based Restricted Unit award, which was based on HP’s performance from FY09-FY11. As you will recall, the performance metrics for the FY09 PRUs were:

1. HP’s annual cash flow from operations as a percentage of revenue for each of FY09, FY10 and FY11, and

2. HP’s Total Shareholder Return (TSR) for the FY09-FY11 period relative to the S&P 500

As a result of the change in HP’s stock price over the three-year period, the TSR requirements were not achieved, and no shares will be released from the FY09 PRU award.

Of course, we are very disappointed that there is no payout this year from this program, and you have specific management actions to communicate the final disposition of this grant for FY09 PRU award holders. The actions are:

– During the One Conversation, you will also need to address the outcome of the FY09-11 PRUs with employees on your team who are FY09 PRU Award Holders

– Please review the FY09 PRU Talking Points and PRU FAQs [Here the email contains links to internal HP documents I have not seen. -Ed] to prepare to have this discussion with your affected employees, who are listed below: [Here the printed copy of the email I received has several listed names blacked out.]

For any other questions about FPR, please ask Contact HR.

Regards,
Evan Wittenberg, VP, Global Talent

Stan Dunlap, VP, Global Rewards

And here’s some more detail about how the PRU program worked, taken from HP’s 10-K and proxy filings:

HP employees who participated in the PRU plan could track the accrued amounts of their PRUs on a Merrill Lynch Web site. I talked to two sources, both of whom had accrued PRUs worth between $100,000 and $200,000 for fiscal 2009 and 2010. Other less senior employees who received PRUs would have accrued between $20,000 and $50,000 in their accounts.

One source told me that as rumors began to circulate that PRUs would not be paid for 2011, most people assumed that the accrued amounts for 2009 and 2010 would still be paid. How wrong that assumption was became apparent on Monday, Dec. 11, as the amounts in their Merrill Lynch PRU accounts plummeted to zero. As recently as Dec. 9, the prior Friday, the value of the accrued PRUs for 2009 and 2010 were still displayed.

HP CEO Meg Whitman discussed the decision not to pay out PRUs in a conference call with HP’s top 900 executives days later. According to people who were on the conference call, Whitman primarily blamed the economy.

Despite the fact that HP followed the PRU program’s provisions correctly, affected employees are grumbling that management has “crossed a line.” As one source put it to me, revealing the decision during the weeks leading up to Christmas was “unconscionable.”

“If they will cross this line now, there’s no line they won’t cross later,” said one source, a current HP employee who asked not to be named. “They could have played straight with us and told us this was coming months ago. The way they’ve done this is not in keeping with the HP way.”

The decision is hurting morale at a time when HP needs to hold on to its people. One source, who left HP recently for another company, says he is routinely being peppered with resumes from HP employees looking to jump ship.

Update: An HP spokesman says of the PRU program that compensation is tied to performance and the 2011 fiscal year wasn’t a good one for HP. Still other bonus programs did pay out. “High-performing employees were still eligible for salary, stock and bonus awards that year.”

As to the timing of the decision, he said since HP’s fiscal year ends on Oct. 31, it’s natural that compensation decisions fall in December. “That’s the time every year that we do raises and award bonuses. That is when these things are announced.”

Of course, many of the affected employees are blaming HP’s prior generation of management for not meeting results, as well as its board of directors. HP shares fell considerably during the 11-month period that Léo Apotheker was CEO, and it was on his watch that the company shook the confidence of investors, as it missed quarterly earnings targets three times in a row.

This probably won’t make them feel any better, but Apotheker is affected by the loss of PRUs, too: Under terms of his separation agreement, Apotheker was to have received 424,000 PRUs which on paper would be worth $12 million and change, given Monday’s share price. But according to his contract on file with the SEC, his PRU grants were made under the same rules as those made to other employees. That means they’re gone, just like those of other affected HP employees.

Seven Questions for Bill Veghte, Hewlett-Packard's New Chief Strategy Officer

Arik Hesseldahl — Fri, 20 Jan 2012 15:25:03 +0000

Earlier this week, Hewlett-Packard gave Bill Veghte, its executive vice president for software, a new title: Chief Strategy Officer. The job has been vacant since Shane Robison retired last year.

Veghte joined HP in 2010 after 20 years at Microsoft, where he managed the $15 billion Windows business and oversaw the launch of Windows 7. At HP, he has been credited with growing its software revenue by 18 percent last year.

Given Veghte’s history as a software guy, his appointment to this role can’t help but be seen as a key signal by CEO Meg Whitman of the role she sees software playing in HP’s strategy going forward. That was one of the things I asked Veghte about when we spoke by phone earlier this week.

AllThingsD: What, in your view, is the role of the chief strategy officer at HP, and what do you expect it to entail in the coming year?

Bill Veghte: As we’re out talking to customers, they’d like to buy more from HP; they’d like HP to be more successful. They look at the advances we’re making in networking or storage or printers, but they want to know why the whole is greater than the sum of is parts. What is HP’s strategy for continued leadership in the market transitions that are going on? And some customers would say that where HP is concerned, that’s not a fully realized opportunity.

And you’re coming at it from the software part of the business, and we’ve heard from Meg saying she’d like to grow opportunities in software. Your appointment, to me, sends a bit of a signal that software is going to be a big part of HP’s strategy to get things turned around. Is that accurate?

I think, certainly, as I talk to Meg and Ray [Lane, HP chairman], and with the members of the executive committee, I’ve found that this is a catalyzing role. If done right, there are different models of strategy in different Fortune 500 companies. And the one that makes sense here is catalyzing with other business units. Whether that’s Vijay Joshi in printing and imaging, or with Todd Bradley in PCs, or John Visentin in the enterprise group, there’s a strategy that each one of those is trying, and which is accretive to a whole that is greater than the sum of the parts. And so, to the extent that software is glue or networking is glue, I think it’s a statement that has more to do with a pan-HP strategy than something that’s specific to software.

What’s Job One, starting on your first day?

Job One is making sure that as we have those conversations with customers, they see an HP that is unified around a set of constructs and offerings that deliver what they need. It’s different from having offerings that are, by themselves, individually great. It’s about having unifying themes and constructs.

It seems that you’re talking about finding a way to routinely and thoughtfully combine different things that HP makes or does, in ways they aren’t being done now. Is that what you’re getting at?

I think that very accurately characterizes the opportunity. When we talk to the leadership team, we hear a lot of the same thing. There is a lot of great stuff within HP, whether you get that in terms of market position, or IP, or people. I like how you put that: How do you routinely and thoughtfully combine things, particularly in light of the market inflections that are happening. We are in a tectonic shift, and that can be an opportunity, if you clearly spell out the value proposition for customers. Not only in each one of the units, but where you’re thoughtfully combining them so that the whole is greater than the sum of its parts.

I thought of an example around meeting the needs of the market. There was an IHS iSuppli report out earlier this week about cloud servers, which are growing. But customers are going to Taiwanese ODM companies to get customized products, while at the same time cloud servers are growing generally. Is this the sort of thing that might affect HP?

I was talking to Dave Donatelli [general manager of Enterprise Servers] about this recently. It’s interesting, because it seems like in more recent months it has flipped back, because of the integration within that customization. A great example that Dave and I have been working on is the whole cloud system piece. You’ve got a lot of great stuff in automation and orchestration software that is inherently cross-platform, and which crosses virtualization engines and marrying that deeply with the converged infrastructure. We’re the only company that can give you a single stack, soup to nuts, from a single vendor. The core construct is that there’s a lot of private cloud build-out going on, and those customers who are doing it are saying they don’t want to be the systems integrator for six different vendors, and they also prefer not to be locked in to a single vertical stack. That’s a huge advantage for us. And to your point about routinely and thoughtfully combining, we should do exactly that. It’s been doing well for us in the marketplace, but how do you make that routine against the opportunities we see in the marketplace?

You spent about 20 years at Microsoft. How does that inform what you’re bringing to this job?

At the core, any of these jobs are about identifying and exploiting market shifts for customers. I had the privilege of having a front-row seat during some big marketplace disruptions, and helping catalyze businesses and delivering superior market positions and solutions. It’s all about handling change, and turning it into an opportunity.

"Menry" Is Back at HP: CEO Meg Whitman Hires Longtime PR Guru Henry Gomez as Top Flack

Kara Swisher — Tue, 10 Jan 2012 22:18:28 +0000

Through many years of working together, first at eBay and then during the failed California governor’s race, Meg Whitman has relied heavily on Henry Gomez for communications advice.

Their close working relationship even earned them the mash-up nickname among those at eBay and elsewhere: Menry.

So when she got the CEO job at Hewlett-Packard, it was a bit of a surprise that Gomez — who has recently been living on the East Coast (see baseball cap above) — helped out a lot, but was not named to the top PR slot at the tech giant.

No longer, it seems, with Gomez being named EVP and Chief Communications Officer at HP today.

It’s a big job, given the hard work that Whitman faces reviving the iconic tech company, which has been beset by strategic and business challenges of all kinds, shapes and sizes in recent years.

While it might be seen as an adjunct to the business, the forward-facing parts of HP are in need of a powerful public relations initiative, which is presumably why Whitman wanted one of her most trusted and longtime staffers in the post.

According to HP, Gomez will become a member of the company’s executive council and report directly to Whitman.

Said HP in its press release, which you can also read below: “Gomez will be responsible for HP’s media and industry analyst relations, executive communications, employee communications, government affairs and global social innovation.”

As in, the voice of Menry is back!

Here’s the release:

HP Names Henry Gomez Executive Vice President and Chief Communications Officer

PALO ALTO, CA, Jan 10, 2012 – HP today announced that Henry Gomez will join the company as executive vice president and chief communications officer.

Gomez also will become a member of HP’s executive council, reporting to Meg Whitman, HP president and chief executive officer.

In this newly expanded role, Gomez will be responsible for HP’s media and industry analyst relations, executive communications, employee communications, government affairs and global social innovation.

Gomez, 48, comes to HP with 26 years of communications experience. He spent most of the last decade working at eBay, where he served in a variety of roles including senior vice president for Corporate Communications and president of Skype. Gomez played a crucial role in building eBay’s brand during the critical years following the company’s initial public offering.

Prior to joining eBay, Gomez was vice president of Corporate Affairs at HBO in New York. He started his communications career at Hill and Knowlton and has worked on a wide array of public relations and marketing communications challenges in numerous industries.

Most recently, Gomez ran his own consulting business, providing communications counsel to clients such as H&R Block. He was on the leadership team of Whitman’s 2010 campaign for governor of California and has been involved in government and political affairs throughout his career. In 2011, Gomez was appointed to the board of BJ’s Restaurants, Inc. He is a graduate of Boston College.

“Henry is an excellent manager and communications executive,” said Whitman. “People around the world care deeply about HP, and I believe we have an important obligation to clearly explain where we’re headed and why. Henry will work closely with the entire leadership team to make certain customers, partners, employees, and shareholders fully understand our vision and strategy.”

About HP HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com .

What Have We Learned From the Mark Hurd Letter?

Arik Hesseldahl — Tue, 03 Jan 2012 00:11:33 +0000

It’s been a few days since the world devoured and digested the contents of the June 2010 letter to then-Hewlett-Packard CEO Mark Hurd, alleging a pattern of sexual harassment of a marketing contractor during a period running from 2007 to 2009.

The facts are pretty simple: HP investigated, found that its sexual harassment policies hadn’t been violated, but in the process found irregularities with expense reports that made HP’s board of directors lose their trust in Hurd. He resigned on August 6, 2010, following a settlement with the contractor, Jodie Fisher, who wrote a letter saying there were unspecified “inaccuracies” in the original letter.

So what have we learned from this visit back to the summer of 2010? And, are there any larger implications for Hurd or for his current employer, Oracle? Or, moreover, for the world at large?

The short answer to the second question is, of course, no. Immediately in the wake of Hurd’s departure from HP, Oracle CEO Larry Ellison rushed to Hurd’s defense, then offered him a job. There’s no indication that any of the new revelations have tarnished Hurd’s standing with Ellison or within Oracle.

So long as Ellison is happy with Hurd as Oracle’s co-president, Hurd is secure. The way Ellison appears to see it, HP was dumb to let Hurd go over what was ultimately a problem with expense reports. Hurd is human, but on game day he plays to win, so Ellison made space for him on team Oracle. The day Hurd doesn’t play to win is another matter.

HP investors can now evaluate and debate whether that company’s board of directors overreacted to the matter, although in reality it doesn’t matter. What’s done is done, and HP’s new CEO, Meg Whitman, has plenty on her plate for the year ahead, not the least of which is undoing some of the damage to its share price done under Hurd’s replacement, Léo Apotheker.

What else have we learned? Hurd’s not the first, nor sadly the last, senior executive to be accused of sexual harassment. For every letter like this one that sees the light of day, there are thousands more that the public never reads.

The U.S. Equal Employment Opportunity Commission has tracked the number of sexual harassment claims it investigates each year since 1997, when there were 15,889 cases. It is perhaps encouraging to learn that the number of such cases investigated by the EEOC has dropped by 26 percent to 11,717 as of 2010. (And here’s an interesting fact — 16 percent of these claims were from males.)

On average, these investigations lead to about $50 million each year in monetary benefits paid to the people who file claims, and these don’t include cases that go to court.

And the fact remains that HP’s own internal investigation exonerated Hurd of sexual harassment, and Fisher has stipulated that there were “inaccuracies” in the original letter.

Still, none of it has to be true for the contents of the letter to be a perfect case study in what not to do. As such, it should be required reading for executives at every level of seniority. In that sense, painful and tawdry as it must have been for those concerned, the letter’s release constitutes a public service.

(And speaking of public service, the image above is the early 1990s-vintage graphic from NBC’s public service announcement campaign.)

Resolutions for 2012 (Comic)

Nitrozac and Snaggy — Fri, 30 Dec 2011 22:30:12 +0000

Here is the latest comic from our Joy of Tech friends at Geek Culture, Nitrozac and Snaggy. Joy of Tech appears three times a week in the Voices section of this site.

Has the HP TouchPad Lost Its Resale Luster?

Lauren Goode — Mon, 26 Dec 2011 18:44:28 +0000

After a resale run that had consumers clamoring for the discontinued tablet, has Hewlett-Packard’s TouchPad finally lost its appeal?

If eBay and Amazon listings are any indication, that appears to be the case.

Amazon.com currently lists 59 new 16 gigabyte Wi-Fi TouchPads, ranging in price from $263.69 to $272.99. There are also 18 used TouchPads (and a couple of refurbished ones) being sold via the site.

EBay shows more than a hundred 32GB TouchPads for sale, some available through auction and others through immediate purchasing, ranging from $225 to $350 (yes, really).

It’s a far cry from the fire sale on the device earlier this month, through HP’s own eBay channel. It was reported that the computer maker went through its remaining inventory in minutes at resale.

Of course, TouchPads were then going for a mere $99 — much less than the original asking price of $399 (for 16GB) and $499 (32GB).

The TouchPad first hit stores on July 1. But it failed to catch on with consumers, and HP announced six weeks later that it would be exiting the hardware business of its webOS software system. That meant the death of the TouchPad, which had seen disappointing sales, to put it kindly.

Suddenly, the discounted device became a hot item, with some vendors reselling fetching nearly $300 for the tablet on eBay.

In October, the tablet was offered as a part of a bundle with any HP- or Compaq-branded PC, through Best Buy, which had sold less than 10 percent of the 270,000 TouchPads it had in stock.

It’s hard to say whether the TouchPad would still be flying off virtual shelves now, post-holiday, if it was listed at a lower price point. HP recently decided to open up webOS to the outside development community, but there are still questions about the future of the platform. With no new apps coming for the killed tablet, and with users facing the possibility of a lack of technical support — not to mention the entrance of the $199 Kindle Fire into the tablet market — it’s hard to imagine that many people will want to pay exorbitant prices for HP’s tablet.

But for now it’s safe to say that consumers don’t seem to want to touch the TouchPad anymore.

Could Security Be HP's Unexpected Strength?

Arik Hesseldahl — Mon, 19 Dec 2011 14:44:27 +0000

Hewlett-Packard is, after much mishegas in its C-Suite, on the mend. CEO Meg Whitman has set the expectation that 2012 is going to be a year devoted to getting the company back on track and, among other things, rebuilding its balance sheet after a year and change of painful twists and turns that have shaken the confidence of investors and analysts in the venerable tech giant, once considered a relative safe bet among tech stocks.

With its shares trading down 39 percent since the end of 2010, there’s clearly still a lot of work to be done. But analysts are taking notice and expressing new confidence. In a note to clients this morning, ISI analyst Brian Marshall says HP is looking better for a variety of reasons — one of them is its little-noticed IT security business.

If you break down HP’s various lines of business, you’ll find, Marshall argues, that its security assets are surprisingly strong. In 2009 and 2010, HP made two key acquisitions in the area of security: It spent $1.5 billion for ArcSight, a security software player; before that, it nabbed the networking concern 3Com for $2.7 billion. A key asset in that deal was TippingPoint, a network intrusion prevention product.

Marshall writes that HP’s security assets bring in about $1.5 billion in sales and are growing at about 30 percent year, with gross profit margins in the neighborhood of 80 percent. This compares favorably with security outfit Check Point, which trades at a multiple of about 10 times sales, Marshall says.

Security is going to matter a lot more to HP’s corporate customers, as they start sweating over intrusions by hackers and nation-states poking holes in the infrastructure and looking for valuable information to steal, he says.

If you conservatively assume that HP’s security assets are worth half as much as Check Point, or only five times sales, and then assume that they report a reasonable $2 billion in revenue in calendar 2012, (nearly 2 percent of HP’s expected total sales), you wind up with a business unit that’s worth about $10 billion, or one-fifth of HP’s market cap. Suddenly, the security push that HP announced in September makes a lot more sense.

Security, Marshall says, is just one leg of a four-legged stool that HP has in its favor. The other three legs are its enterprise storage, networking and server businesses, and the “seat” of the stool which tie them all together are the software and IT services businesses. The one weakness, he concedes, is its software portfolio, which has historically been small and limited, and accounts for about 2 percent of sales despite such big acquisitions as Mercury Interactive and Opsware.

Even so, Marshall sees a 30 percent upside to HP’s valuation, and has pegged it with a $34 price target and Buy rating.

HP's Whitman: We Have to Walk Before We Can Run With webOS

Arik Hesseldahl — Fri, 09 Dec 2011 20:47:38 +0000

I just got off the phone with Hewlett-Packard CEO Meg Whitman and one of HP’s directors, Marc Andreessen. We had a quick conversation about today’s decision to share HP’s webOS with the open source community.

And though the immediate question over whether or not HP would ultimately keep the platform or sell it to someone else is now answered, it was clear from talking with Whitman and Andreessen that there are still a lot of issues to sort out. There are questions about business models, how to work with outside developers, hardware manufacturers, and even over how many people will keep their jobs.

It’s also notable that Andreessen was on hand because of his history with open source projects. As the creator of the Netscape Web browser, Andreessen was there for that company’s much-remembered IPO, its acquisition by AOL, and the transformation of the Netscape browser into an open source project now called Mozilla, which produces the popular browser Firefox.

My first question was about what kind of contribution — both financial and otherwise — HP is prepared to make to this new open source project.

AllThingsD: Meg, do you have any thoughts on how much you’re going to contribute to this webOS effort in terms of money and people at this point?

Whitman: I won’t give you a dollar number but I will tell you that it will be a substantial software investment but it will not break the bank at HP. This is a wonderful asset, actually, but what I was telling employees this morning is you’re a start-up now. You’re a start-up with a number of people, 750,000 installed devices out there, and with your first venture capitalist, and that’s HP. And let’s go figure out how to change the world out there.

The thought that it’s now a start-up makes me want to turn to you, Marc, and ask, what do you think of that?

Andreessen: I’ve been lucky enough to have been involved in a number of what I think have turned out to be very successful open sourcing projects that are a lot like this. And of course the big one that I was in the middle of was the transition from Netscape to Mozilla, which is not a perfect analogy but there are a lot of similarities and that just turned out marvelously well. And then obviously Linux has been a huge transformative force in the industry in the last 10 years, and both Linux as an open source project and Red Hat as a business have been spectacular. So we live in a world now where open source now, unlike 10 or 15 years ago, is mainstream, it’s widely accepted, it’s widely adopted, it’s trusted, enterprises are willing to bet on it, hardware companies are willing to bet on it, and chip companies build it into their plants from day one. So I think we have a real opportunity to have something really special happen.

Meg, in looking back to before your time as CEO when there was a plan to have webOS on printers and all the consumer PCs. Will there be any changes to those plans?

Whitman: I think we’ve got to walk before we run here. And let’s see what form webOS takes. In 2012 as you know we’re bringing two Windows 8 tablets to the market, we’re excited about that, we’re going to be working with them [Microsoft] constructively, but there may be an opportunity in 2013 to think of a different device, maybe come back to tablets. Let’s just see how it goes, but obviously HP would be one of the likely suspect hardware manufacturers for webOS.

So you’re not closing the door entirely to hardware down the road, just not right away?

Whitman: In all likelihood, not in 2012. The 2012 road map is already done.

One thing that comes to mind is that, based on our reporting, there may be headcount reductions in webOS at some point. Can you give us any clarity on that?

Whitman: I can’t. We have released no numbers on that and the reason is we don’t know. I’d tell you if I knew, but we don’t know. We’ve got to get a business plan, a product road map, a business model that we think will work, and decide how we’re going to engage with other hardware manufacturers, how we’re going to engage the open source community and that will determine ultimately the types and numbers of people.

Three Months After Bartz's Firing, It's Hurry Up and Wait at Yahoo (A Big Honking Update)

Kara Swisher — Wed, 07 Dec 2011 17:43:12 +0000

“Let’s go. Yes, let’s go.” [They do not move.]

– Samuel Beckett, “Waiting for Godot”

In Internet terms, the removal of Yahoo CEO Carol Bartz happened a dog’s age ago.

In fact, it was September 6.

Since then, it has felt like a slow slog, especially contrasting the situation with that of another troubled Silicon Valley giant, Hewlett-Packard, which fired its CEO Léo Apotheker and appointed a new one, Meg Whitman on September 22.

Since then, in comparison, the former eBay CEO has been like the Energizer Bunny, making a series of major and often difficult decisions, including: Holding onto its PC unit; reaffirming its controversial deal to buy Autonomy; promising a decision on the fate of its webOS unit within the next two weeks; appointing new execs; and even buying a company.

To be fair, Yahoo did acquire advertising start-up Interclick.

Otherwise, still no sale or investment deal. No new CEO. No Asia resolution. And, perhaps most importantly, no clearly articulated strategy going forward.

It’s not that Yahoo’s leadership isn’t working at it.

Some fervently insist to me that there is a “plan,” as if there is some clever game of Internet Stratego going on that I cannot possibly grok.

Mebbe — but of this I have no doubt: The Yahoo board has indeed been huffing and puffing away, weighing and measuring, considering and debating.

A lot.

Maybe I’m just too impatient. I am (ask my kids).

Or maybe Yahoo’s beleaguered employees are, one of whom just wrote me plaintively, “unreal how they can drag this out,” in what has become a common refrain up and down the ranks.

Or maybe it’s the Asian partners, Alibaba Group and SoftBank, who are antsy and have considered a variety of nuclear options in order to get back stakes Yahoo holds in them. Said one: “The strategy seems to be to frustrate and exhaust us into submission.”

Or, finally, maybe it’s the newly frustrated recent bidders for a partial stake in Yahoo, Silver Lake and TPG Capital. Declared one to me after I warned that Yahoo might, in fact, drag the proceedings out longer than you might expect: “I thought you were kidding.”

Nope, welcome to the Yahoo waiting game, PE guys!

So, to help us all get through it, here’s a quick update primer on what’s what on the various fronts:

Who’s in Charge Here?

Technically, it is the Yahoo board, which is aided by interim CEO Tim Morse.

First, a word about Morse: By all accounts, he is doing a very good job as temporary head honcho — calming the troubled company, making swift decisions about daily operating issues and being a generally nice dude to deal with.

“He’s Yahoo’s no-drama Obama, in comparison to what was happening before,” said one exec, in reference to the more volatile regime under Bartz.

Still, despite his very pleasant all-hands meetings, such as one earlier this week, Morse had previously been Yahoo’s CFO and not an Internet-savvy visionary to give the company inspiration. No insult intended, but he’s the accountant guy.

To be fair, he is not meant to be the visionary, but many at the company are yearning for exactly that.

A role that is now being taken up again by co-founder, former CEO and director Jerry Yang, who dozens of employees tell me is unusually involved in operational details these days for a board member.

I get reports of sightings of him all the livelong day: Jerry in demand-side advertising confab! Jerry chitchatting with entrepreneurs from a possible start-up acquisition! Jerry weighing in on a variety of products. Look, over in the cubicle, it’s Jerry!

This is seen by Yahoo employees as a good thing and also a bad thing, since it’s hard to be running your little divisional show at Yahoo with the dude who invented it all looking over your shoulder, even if he means well. People naturally defer to Yang, the 800-pound Web icon in the room.

But, given the overwhelming state of stasis at Yahoo now — “No one can do anything until we find out how the story ends,” said one staffer — and employees eying the exits, no power at Yahoo really matters but the board.

You know, the board that has gotten the company to this moment of crisis and profound ennui, which is its own particularly ironic irony.

To better understand the power dynamics on the board, above is a little chart for you to peruse to give you an idea of which independent board member is running what key committee.

The only truly important one is the Transactions and Strategic Planning committee, which is headed by Intuit President and CEO Brad Smith and includes former Akamai President (and former Yahoo CEO candidate) David Kenny, top HP exec Vyomesh Joshi and other guy Gary Wilson.

And, in completely visible shadow form, Yang. Multiple sources close to the situation said he has been a key force in the strategery around a possible sale or investment.

This has caused not more than a little tension among board members, but everyone seems to like the much described nicest-man-in-the-room, Smith, and hopes his cool head will prevail.

Another important part of the board is the Nominating and Corporate Governance committee run by Patti Hart, who is energetically and simultaneously — if pointlessly — in search of a capable new Yahoo CEO.

Or, as I like to call this mythical person: The Unicorn.

The Deal

As I and many others have previously reported, there are bids on the table for partial investments in Yahoo by two very powerful private equity firms, Silver Lake and TPG Capital.

It’s a PE rumble, with a side of Microsoft financial backing! (I think Silver Lake’s Egon Durban makes a very nice Riff, while Microsoft’s Steve Ballmer is the perfect Officer Krupke.)

My fervent wishes for some figurative and dance-accompanied knife-play aside, the bids are essentially the same in general and different in particular. Silver Lake is offering about $16.50 a share, while TPG is dangling a tiny bit more. Silver Lake has power entrepreneur and VC Marc Andreessen on its side, while TPG is trying to get Silicon Valley fave investor and start-up whisperer Reid Hoffman of Greylock Partners and LinkedIn on its team. Both have ideas on CEOs, strategy and what to do about the Asian assets.

This type of deal could happen suddenly and you’ll hear about it quick, since the losing side will immediately trash it to the media.

As you might expect, each director has their favorite PE firm, with some not liking Andreessen, some thinking the TPG bid is a little light, some for a whole-company deal and some wanting Yahoo to hire its own CEO and run the place itself.

Of course, the last one shows a disturbing level of denial and should be a nonstarter, given the board’s abysmal record on CEO choice and its riding of Yahoo to this sad point in its storied history.

Here’s what to expect on the PE front: A lot of wrangling behind the scenes with frequent leaks to the media about what each side wants and will not yield on.

CEO choice or no CEO choice, that is the question!

Also a big factor are Yahoo’s major shareholders, few of whom like the partial investment deal, which is known as a PIPE (Private Investment in Public Equity), because of the insiderness of it all and because they prefer a whole-company sale at a higher price.

There is also pressure from activist shareholders like Daniel Loeb of Third Point, who has attacked Yang and others on the board and is ready to pounce with a proxy fight if Yahoo tries to override shareholders too egregiously. And, of course, the inevitable lawsuits over any arrangement that seems to block a whole-company bid.

That said, such a mega-deal seems unlikely, since it is too pricey and despite a lot of noise that Yahoo’s Asian partners were ready to strike with a takeover in order to get back Yahoo’s big stakes in their companies.

That’s kind of like buying a store to get back the cool pair of shoes you sold, but bankers love to scheme up this stuff. While it certainly could happen, it would be a bear of a deal.

Perhaps more like Yogi Bear, hopelessly angling for a tasty pic-a-nik basket — but grrrr anyway.

But perhaps the biggest factor in all of this mishegas is time. There is none on a lot of levels, most especially the increasing level of brain drain and drift at Yahoo. After the New Year dawns, this is going to spin right out of control and amount to the biggest internal challenge Yahoo faces.

An Asian Solution

As I and others have reported, Yahoo is entertaining yet another proposal to sell all or part of its Asian assets back to the companies, which make up a bulk of its market valuation.

The relationship between Yahoo and its Asian partners has long been fraught, and today the difficulty of reaching an agreement remains a vexing issue. That’s because it is hard and complex and because no one wants to do what the other side wants.

I am no tax attorney, but it seems as if Yahoo will ultimately come to some deal with China’s Alibaba and Japan’s SoftBank, which could include big investors like Russia’s DST Global.

And, as I reported last week, the Asian partners want to strike a deal with the current board rather than lose leverage with a much cannier new owner.

It’s a tough decision in all aspects to strike, but would remove the focus on the fact that Yahoo’s most valuable asset is something it is not running and simply holds due to a good stock trade in years past.

Years past should be the operative thought here, since the Asian assets have nothing to do with what Yahoo needs to do with its core U.S. and global brand.

You know, the thing that allowed them to buy those lucrative Asian assets in the first place?

Strategery

And that’s the crux of all this, isn’t it? Yahoo needs a new strategy and fast.

Or it needs to clarify and hone its current strategies around advertising and media and define itself once and for all. While it often touts itself as a premier digital media company, it’s still not clear exactly what Yahoo is saying by that.

In fact, incredibly, sources told me that the board was still wrangling over the tired issue of what Yahoo is at its most recent meeting — essentially, is it a products company or a media company?

If I had to listen to that who-am-I-anyway debate again, I think I would scream, given how many important Web trends that Yahoo has whiffed in recent years, many of which were right in its own wheelhouse.

How much damage this has caused to Yahoo’s core business is a critical one to determine, with many feeling the situation is too far gone to revive it and others confident that this is simply an issue of poor execution.

I am in the middle on this one, but all the indicators of Yahoo’s business have long been heading in the wrong direction, and results in the next quarter are expected to underline this even more.

Thus, the board’s navel-gazing at this point is untoward, considering that it is presiding over the possibility of a sale that should not have had to happen in the first place. While it is not quite a fire sale, it’s no cause for celebration at all the attention, either.

In fact, it’s also pointless, since — if this all resolves as it should — the current Yahoo board will not be the one determining the company’s future any longer. Remember that: This group should and will be gone for the most part.

Yahoo shareholders and employees can hope, at least.

Then, it will be up to the next group of leaders to make the very hard choices — including what are likely to be massive layoffs and radical surgery on its offerings — for what’s to come next.

In the end, that is all that will matter. Until then, as usual, you’ll have to sit tight.

Autonomy's Mike Lynch Talks About Being HP's Speedy Tiger Cub (Video)

Arik Hesseldahl — Tue, 06 Dec 2011 22:31:58 +0000

Mike Lynch, CEO of British software firm Autonomy, appeared on Bloomberg TV yesterday to talk about his working life as a Hewlett-Packard executive. His appearance came on the heels of remarks at a Bloomberg event in London in which he compared HP to a “mother tiger” not rolling over its cub, and praised HP for leaving Autonomy to its unique, “speedy” culture.

Autonomy, of course, became part of HP in late October, following an $11.7 billion deal that was announced in mid-August and was consummated after the company was shopped — or not, depending on whom you ask — to software giant Oracle. No one is sure of the details, except that Frank Quattrone was involved.

In the video below, Bloomberg’s Francine Lacqua asks Lynch what it’s like working with CEO Meg Whitman, and why the U.K. isn’t seen as an important hub for tech companies, a notion he takes issue with given the existence of, among other things, his own company.

Whoops, HP Just Bought Another Company

Arik Hesseldahl — Tue, 06 Dec 2011 14:22:23 +0000

On Hewlett-Packard’s last earnings call, CEO Meg Whitman told analysts that they should assume that HP would be doing no large acquisitions or mergers in 2012. It will be a year, she said, for “rebuilding the balance sheet.”

Then Whitman hedged: “Let me put it that way. I would say these are going to be more acquisitions, in the sub-$500 million range would be my guess. We might get to $1 billion, but I doubt it.”

Now we know what she meant by that. Overnight, HP said it will acquire Hiflex Software, a German maker of printing management software. The deal is small enough that terms haven’t been disclosed, and that makes it hard to analyze.

Hiflex is based in Aachen and specializes in supplying print services to the commercial printing and graphics industry. Launched in 1991, it has completed some 300 customer projects, and its products are generally used to help different parts of a printing operation work together.

Vyomesh Joshi, HP’s executive vice president and the head of its Imaging and Printing group, described the deal like so: “HP wants to break the traditional barriers of how and where business customers print, making it easy for them to produce custom or personalized materials anywhere, anytime … Hiflex’s technology provides a powerful platform to deliver on this goal as part of our overall cloud printing strategy.”

Brian Marshall, an analyst with ISI Group, said in a note to clients this morning that he thinks it’s a “small deal,” but one that amounts to “an inexpensive way for HP to build exposure to cloud services that integrate with existing HP assets,” like printing.

If HP is going to be acquisitive at all during 2012, the deals are going to look like this. Now, at least, we know what to expect. And, as Whitman sets expectations, so far she’s sticking to what she says, which is a good sign.

For HP, a Simple Argument With Oracle Over Intel's Itanium Chip

Arik Hesseldahl — Thu, 01 Dec 2011 14:23:07 +0000

The legal sparring between Hewlett-Packard and Oracle over Intel’s Itanium chip is likely to get more contentious before the end of the week, as a deadline for a key filing from Oracle comes on Friday.

The expected filing is Oracle’s amended cross-complaint, wherein the company will lay out the basis of its legal argument explaining why its March 23 decision to stop building software that runs on servers using Intel’s Itanium chip was not only justified but doesn’t violate an agreement struck last year between Oracle and HP.

Oracle has made several colorful claims in court. Last month, for example, it compared an arrangement between HP and Intel to continue to produce and evolve the Itanium chip to a remake of the film “Weekend at Bernie’s.” And in August it argued that HP engaged in fraud by not telling Oracle that it was about to hire Léo Apotheker as its CEO and Ray Lane as its chairman when it was negotiating a settlement to a 2010 lawsuit over Oracle’s hiring of former HP CEO Mark Hurd.

But the real issue is a simple one, say people familiar with HP’s thinking in the case. Did Oracle agree to a contract with HP to continue to support Itanium — as it has been doing for years — or not?

The year 2010 was a weird one for executive moves among tech companies. Hurd resigned as CEO of HP, and took a job as president of Oracle just as Oracle was in the process of acquiring Sun Microsystems. HP sued Hurd and Oracle, and soon they settled. HP says that a clause in that settlement included a provision that Oracle would continue to port its database software to HP servers running the Itanium chip. Oracle has argued that this clause is not part of the final agreement. The settlement document itself remains confidential, but its details will likely emerge in the trial. Expect lots of arguing over different versions of the agreement.

One key part of Oracle’s argument has been that HP has been paying Intel to keep the Itanium chip alive in the face of its failure to gain traction in the mainstream server market over the last decade. This is something that HP readily concedes, since it and Intel developed the chip together in the early 1990s, and regularly renew their agreements — in 2004, 2007 and again in 2010 — to commit resources to build it and to design new generations of the chip every few years. The latest agreement calls for Intel to build two new generations of the chip.

Another argument Oracle has made concerns HP’s management during the last year. When the 2010 agreement ending the Hurd lawsuit was struck, HP was nearing the end of its search to replace Hurd. CFO Cathie Lesjak was interim CEO at the time. Ten days later, HP announced that Apotheker would become CEO. In a filing in August, Oracle argued that it never would have agreed to the Itanium partnership had it known that Apotheker, a onetime co-CEO of SAP and a figure in a contentious Oracle-SAP lawsuit, was about to become HP’s CEO. Ditto Ray Lane, a former Oracle president who was named HP’s chairman earlier this year.

People familiar with the case say that Oracle seemed unconcerned about HP’s ongoing search for a CEO, and didn’t raise any questions about it during settlement negotiations for the Hurd case. These people say that HP wasn’t deceptive, but that even if it had been it will be difficult for Oracle to argue that it’s not bound by the terms of the settlement. The language is clear and unambiguous enough that Oracle would have to argue that the Itanium clause in the agreement means nothing, these people say.

One thing is certain: The damage that HP is suffering from the ongoing uncertainty in the marketplace over its Itanium-based servers is starting to sting. HP calls these machines its “business critical” servers, and they are industrial-strength computers that aren’t sold in large numbers. Indeed, HP is the only vendor of note that even buys the Itanium chip.

But it’s a historically profitable business — HP won’t say exactly how profitable — on which HP charges its customers large service and support fees. In 2010, HP reported revenue of $2.3 billion from its business-critical operation, amounting to less than 2 percent of its $126 billion in sales that year. In 2011, HP reported that sales in its business-critical unit dropped 23 percent in the fourth quarter over the same period a year ago; sales for the year fell to just above $2 billion.

HP has argued that Oracle’s motivation is to steer HP customers toward its Sun hardware. If that was the strategy, sources briefed on the case say, it isn’t quite working out that way. One lucky party benefiting from the fight, they say, is IBM, who is winning business from some former HP customers. It’s one reason that HP is arguing for a speedy trial.

Whitman: HP Decision on webOS Coming Within Two Weeks

Arik Hesseldahl — Wed, 30 Nov 2011 12:25:42 +0000

Hewlett-Packard CEO Meg Whitman just gave an interview to Le Figaro, a French newspaper, saying that a decision on what to do with HP’s webOS software will come within the next two weeks.

Here’s the key quote, courtesy of Google Translate:

What will you do with your operating system webOS?

We should announce our decision in the next two weeks. This is not an easy decision, because we have a team of 600 people which is in limbo. We need to have another operating system.

Also in the interview, Whitman concedes that if iPads count as PCs, as the research firm Canalys has argued, then Apple will likely overtake HP as the world’s top vendor of PCs. But she says HP would try to retake the crown in 2013.

Whitman is in Europe for an HP corporate event in Vienna, at which HP made some big announcements on the enterprise IT front, specifically around a new concept it calls “information optimization.”

The interview, in the original French, is here; a fair translation into English is here.

When we last heard from Whitman on the subject of webOS, she admitted she wasn’t sure what to do. On Nov. 8, she told an all-hands meeting of HP’s webOS team that she was still mulling over the situation.

Having failed to get any traction in hardware sales, HP killed the TouchPad and all the other webOS-running hardware on Aug. 18. Yet in killing it, HP managed to make its TouchPad device suddenly popular — at a reduced price.

Whatever the result, the whole $1.2 billion acquisition of Palm — which created webOS — has turned out be a bit of a mess for HP. On its earnings call last week, the company said that it is writing off $1.66 billion related to the winding down of the webOS business. Decisions, decisions.

HP Wants to Optimize Your Information, Whatever That Means

Arik Hesseldahl — Tue, 29 Nov 2011 08:01:27 +0000

Ever since Hewlett-Packard announced that it would spend $11.7 billion to acquire the British software firm Autonomy, there have been questions regarding how that company will fit within HP.

HP will answer some of those questions today, with a big announcement of a new enterprise hardware, software and services platform at a company event in Vienna. HP calls this its Next Generation Information Platform: IDOL 10. Practically speaking, the suite includes Autonomy, with its software smarts around finding meaning in unstructured data as varied as TV interview transcripts or chains of email communications; and the analytical muscle of Vertica, a company HP acquired in February.

The way HP sees it — and, to be fair, it’s not the first company to make this kind of argument — the ratio of data that businesses are creating to what they actually use productively is pretty big. Only 15 percent of that information is neatly organized into the rows and columns of a traditional relational database, HP argues, leaving a lot more information — fully 85 percent — that would be useful if you could only capture it, determine its meaning, and analyze it: Video, audio, email, texts, social media, meeting notes. Add to that the explosion of other real-world information gathered from sensors and other measuring devices, and it gets even more complex. It’s a concept that HP is calling “information optimization.”

Mike Lynch, the former CEO of Autonomy, is expected to speak at today’s announcement event in Vienna. And if you happen to be there, you’ll probably also hear from Jan Zadak, HP’s executive vice president for global sales. I talked to Zadak last week, and he filled me in on the news.

It’s all about capturing that “lost” 50 percent to 85 percent of information and making it useful to businesses, Zadak told me. “What we’re trying to do is address the notion of how to enable enterprises around the world to harness the potential of data,” he said. “Traditionally, what you would do is run your relational databases and put all your information in columns and rows, and then you would crunch your data. That is what you would typically do to address what we call ‘structured data’ — everything we can pull into a structural database. But 85 percent of information is unstructured — images, charts, emails, tweets. All types of conversation.”

HP has researched the issue a bit, and reckons that more than half of the information produced at your average business remains unconnected, undiscovered and unused. It’s sort of like that old myth that people use only a small percentage of the capacity of their brains — except it’s probably true. Most business decisions are made with incomplete information, and who wouldn’t want to try to to address that shortcoming?

There’s a lot to the announcement from a product perspective. I won’t go into everything, but here are some highlights. There’s an HP social media solution, intended to help companies mine useful information out of feeds on Twitter and Facebook and elsewhere, to improve customer experiences and make sure the brand isn’t suffering because of some over-eager or ticked-off commenter.

And there’s a backup system, sold under HP’s StoreOnce brand, that came directly from work done by HP Labs. The idea is to store data once, rather than make unnecessary, redundant copies that take up precious storage space.

The announcements also contain some new dashboarding and performance monitoring tools that are aimed at helping IT execs better monitor what their systems are doing and whether or not they’re performing as efficiently as they should be.

Back to Zadak for a moment. As head of global sales, he’s the one who has been charged by CEO Meg Whitman with providing the “single face of HP” to enterprise clients. To that end, I asked him what his priorities are for 2012: Apparently that means spending a lot of time developing the sales force. He took over HP’s Sales University when Thomas Hogan left the company in April, and so far “several thousand” HP employees have been through it. Expect more investments around supporting the sales force generally. Given that so many business segments saw declines in sales in the most recent quarter, that doesn’t seem like a bad idea.

Seven Questions for Seagate CEO Steve Luczo About the Effects of the Thailand Floods

Arik Hesseldahl — Wed, 23 Nov 2011 13:45:10 +0000

Name an executive of any company that makes any kind of computing hardware that contains a hard drive, and you can bet they’re worried about Thailand.

The country is now beginning the arduous job of cleaning up from the floods that killed upwards of 600 people and dealt a body blow to its industrial and manufacturing base.

One industry hit especially hard is the computer business. The world relies on factories in Thailand to turn out critical components used to build hard drives, and factories there are out of commission for now. This is not a trivial problem — the factories in question are not easy to replace, retool and restart once they dry out. Nor is the answer simply for the hard drive manufacturers to build new factories somewhere outside the flood zone.

This is the kind of supply chain disruption that the computer industry hasn’t seen in many years. I had a chance to talk with Steve Luczo, the CEO of Seagate Technology, for his view of the situation. Seagate has been relatively lucky in that its factories haven’t been directly impacted like those of Western Digital and Toshiba. But many companies that supply Seagate with necessary components have been hit, and it will be some time before they’re back on their feet.

Luczo told me that the computer industry as a whole — including companies who make PCs, servers, workstations and any other device that contains a hard drive, whether a set-top box or an enterprise storage device — can expect acute supply-chain disruptions to last well into 2012, and that it will take until the end of 2013 for the industry to return to its pre-flood operating posture. You read that right: It will be two years before the supply of hard drives is anywhere near “back to normal,” and there are simply no easy solutions for getting it fixed.

An estimate by the market research firm IHS iSuppli pegs the available supply at 125 million units, which is about 29 percent short of demand of 175 million units. By its reckoning, more than one-quarter of the world’s hard drive manufacturing capacity has been disrupted in one way or another, including 45 percent of the capacity devoted to making hard drives for personal computers. I spoke with Luczo by phone yesterday, and tossed in an extra eighth question because of the importance of the subject.

AllThingsD: Steve, at a high level, I think everyone understands the problem. There’s been a terrible flood in Thailand, and a lot of factories that make crucial parts for hard drives are out of commission. To that end, I think people expect this to be a temporary problem that works itself out in a couple of months. But you say it’s a much more complex problem than most people realize. You’re tracking this situation day to day, and probably hour by hour. So, how bad is it, really? And what’s likely to happen?

Luczo: What’s surprising to us is that even with all the data out there — we’re six weeks into it — there are a lot of fairly sophisticated companies that haven’t fully come to grips with the depth of the problem and the duration that is likely to occur. What is going to happen in the next couple of weeks is that the real shortage begins to show up right about now. There was already a lot of built inventory and a lot of finished goods moving through the system. And now all that is gone, and I think customers are starting to see shelves of parts go empty, and realizing that they’re not going to be filled for anywhere from one to two months. So the concern is heightened.

We heard Meg Whitman talk about this on HP’s earnings call Monday. She said HP stepped in and started doing some strategic buying. She says HP is going to see effects at least through the first half of next year. Apple talked about it on its earnings conference call, too. Are you hearing from them?

Tim Cook at Apple was way in front of this. I saw Tim the first week it happened, and took him through the situation, and in 15 minutes he understood the magnitude of it. Meg was on the second week of her job as CEO when I went to see her, and she got it right away. HP’s procurement VP, Tony Prophet, was also early to understand this. Companies like that reached out to us early on, because they understood that this is going to be an extended problem. They started asking for longer supply agreements. Deals that would typically last about a year, they’re now asking for two years.

How bad is it really going to be? What’s your outlier worst-case scenario, and then what do you think is a little more realistic?

If you think pre-flood, a mix [of products] that the customers need, the industry had the capacity to ship about 190 million units a quarter. Pre-flood, we expected the demand to be pretty consistent at about 180 million a quarter, with a bump in September 2012 for Windows 8. We now believe the March quarter is going to much more difficult than the December quarter, and December is going to be about 120 million or so. We think the March quarter will be about 120 million, in the best-case scenario. And that’s with customers mixing down pretty aggressively; and by that, I mean companies like Western Digital, who don’t have access to the sliders [a critical component in a drive], are shipping one- and two-headed devices so they can ship more units. So instead of shipping a drive that contains two disks and four heads, which is what the market needs right now, they’ll be shipping a one-disk, one-head or one-desk, two-head product. They’ll be maximizing the units they can sell, rather than shipping the product the customer actually needs. … So we see something like 130 million for March on the optimistic side, and then 150 million for June, 170 for September and then 190 million for December. And so by the end of 2012 you’re back to being close to industry demand. But even then, you’ve not included the impact of that missed 100 million units. And that will take another year to absorb, because it’s not like the industry is building new factories to chase that demand. We can’t over-invest to meet some bubble and then get stuck with excess capacity.

I think, intuitively, people expected companies like Seagate to just build more factories outside of the flood zone, but it’s not that simple, is it? Would this not be a moment to add capacity?

There are some in the investment community who think that’s what is going to happen, and that there will end up being a supply glut after all this is over, but it’s not the case. For us, it’s more a function of how to recover the supply chain and then work with the customer to get a good read on what their needs are for the next several quarters. If we see a multiquarter shortage that goes beyond what I described before, then we would think about maybe putting some capital in place. But we’re not going to do that to solve a temporary problem, because we end up being stuck with the excess capacity. Now if it turns out there is no recovery, and then the industry is more constrained than I first described — and that, by June, the industry is still 30-40 million units short and looks like it will be for the next six quarters — we might revisit. But then we’d want longer-term commitments to make sure we’re not overinvesting. But we’re not to that point yet.

What is this doing to prices? And what does that mean to the person who wants to buy a computer or server this year or next year?

If you look at a 10-year moving average trend, the industry has in general seen prices come down about 2 to 3 percent a quarter, and that is for a particular product. In 2009, there was a little price erosion, and that was because the storage industry recovered quickly from the recession. And there had been massive capital cutbacks, so there were big shortfalls through all of 2009 and into 2010. Then, when the Greece crisis happened, that put a big flatline on a lot of growth, and the industry had put in a lot of capital because everyone expected there would be growth. So, since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs [original equipment manufacturers, or the PC and server manufacturers like Apple, HP and Dell, who buy directly from Seagate], you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever.

The markups in the channel are much higher? Are the channel guys taking advantage of this?

Yes, they’re higher, but I don’t think they’re taking advantage. I’ve heard stories about drives that we sell to OEMs for $60 that show up in the channel at $105. Normally the channel price is within about 10 percent of the OEM price. It’s just the law of supply and demand. They can’t get supply. The channel is getting about a third, at most, of the supply they would typically get. The OEMs are the ones with the supply agreements, so everyone in the channel is way short. In some market segments, supply is about 70 percent below what the demand is. And so those shortages are very acute. The channel is selling the few drives that are out there to whoever needs them the most and is willing to pay for them.

So what does all this mean for Seagate, specifically?

For us it’s a different story, because we’re going to be driving more volume than our competitors, because we’re not as directly affected, and we’re going to be making some technology transitions. When we do that, it lets us take cost out of our product, so we can offer more capacity for the same or fewer parts. That helps us drive down pricing. Our goal is to recapture some of the more aggressive pricing of the last eight quarters, in order to sort of get our business back in balance. Our long-term business model calls for gross margins of 22 to 26 percent. And we use our manufacturing expertise to drive down our costs and then pass that on to our customers. This quarter, end users really won’t see it, because product has been built and has been on the shelves. As the shortages just started occurring, you’re starting to see prices increase in the channel. And then at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages.

One thing that occurred to me when I first wrote about this a month or so ago is that it represents an opportunity for the flash memory chip companies to make some inroads against hard-drive guys like you, mainly on notebooks. Is there a threat that flash could pick up some of the demand?

Some of it, but not very much. I think to the extent that there is a high value purchaser who can afford to pay $200 for 100 gigabytes, then that market will expand from 1-2 percent to 3-4 percent. Of the 35 to 40 percent shortage that exists, could you see a little of that get absorbed by silicon? The answer is yes. But there’s a cap. There’s just not enough of a raw supply of silicon to meet all the demand. Our industry will ship 400 exabytes this year. We would have shipped 450, were it not for the floods. Of that, 180 exabytes is notebooks. Reduce that by 30 percent, and you get about 55 or 60 exabytes. If you were to take all of the capacity from Samsung’s newest state-of-the-art flash factory, and dedicated it just to notebooks, it would only put out 7 exabytes a year. Plus, there are already other markets demanding flash, like tablets and cellphones and other things. So it’s not like you can steal from those other markets. You’re not going to take a $32 product and replace it with a $350 product. Can you do it at the edges of the market? Sure. But the threat is capped by the amount of silicon available and the price point for flash storage, which is still an order of magnitude higher.

HP Is Done Shopping for Acquisitions -- Or Is It?

Arik Hesseldahl — Tue, 22 Nov 2011 15:01:10 +0000

On yesterday’s quarterly earnings conference call with analysts, Meg Whitman, making her first appearance on an earnings call as CEO, sent what at first seemed an unambiguous signal about HP’s plans in 2012: There will be no more big acquisitions.

This, of course, comes on the heels of HP’s controversial and expensive $11.7 billion takeover of the British software firm Autonomy, in a deal — initiated by HP’s prior CEO Léo Apotheker — that officially closed on Oct. 3.

In her extensive opening comments, which you can read at SeekingAlpha, Whitman planted the flag in the “no acquisitions” territory, telling analysts, “you should assume in 2012 that HP will be rebuilding its balance sheet and will not be doing any large M&A.”

Rebuilding is a good word. As The Wall Street Journal pointed out yesterday, among the many choppy waters HP is facing, one of them is capital allocation and its use of cash and debt. Having ended July with $13 billion in the bank, its cash reserve has since dropped to $8 billion. Meanwhile, as the year ends, HP’s long-term debt has swelled to $22.5 billion, from $19 billion in July and less than $8 billion in 2008.

Clearly, we won’t be seeing any deals from HP of the size and scale of Autonomy, 3Par or ArcSight in the near future. Does that mean that HP isn’t looking to buy more companies?

Not exactly. Whitman sent some conflicting signals during the Q&A section of the conference call. Pressed on the point by Brian Alexander, an analyst with Raymond James, Whitman said that HP might do some small deals to enhance its software portfolio, but reiterated that there would be no “large” deals in 2012.

Asked to define “large,” Whitman said, “certainly nothing near the size of Autonomy,” and went on:

“Let me put it that way. I would say these are going to be more acquisitions, in the sub-$500 million range would be my guess. We might get to $1 billion, but I doubt it.”

The problem with that is spurring HP to reliable growth. Companies grow fundamentally in two ways: They sell more products or services, better control their costs and improve their efficiency along the way; or they buy other companies, adding products and services to the portfolio.

And here’s the catch-22 that HP finds itself in: If it’s not going to do large M&A deals, then it’s going to have to rely on uncertain organic growth. Sales in numerous key lines of business, PCs, printers and servers are all down, amid a macroeconomic environment that can only charitably be described as “uncertain.”

So where will the growth come from? By raising investments in research and development, thus boosting operating expenses. Additionally, by taking itself affirmatively out of the M&A game, HP essentially cedes the deal-making ground to rivals Oracle and IBM.

Asked about that by Mark Moskowitz of JP Morgan, Whitman said that HP “cannot continue to rely on acquisitions alone.” A true statement, yet she hedged her bet a bit:

Software would be the one area that I think there maybe some assets that are ready to move in 2012, and we would want to be there. But again we have to deal with the situation in which we’re in and we made a big acquisition last year, which by the way, we haven’t talked about Autonomy. I’m excited about that acquisition. We can talk more about it. So there may be two or three acquisitions that we want to take a look at in the Software space, and now I know I’m going to be held to. If it’s less than $500 million, we want to do it. Let me reframe that. If there is a great acquisition that’s in the $1 billion range, maybe we will take a look at it. But we’ve got to be sure it fills a hole, that we don’t pay too much for it and that we are financially disciplined about it. So that’s a caveat I’ll give to you. Listen, I have a history of, to some degree, using acquisitions to grow companies. I’m in favor of acquisitions, but I will tell you we cannot continue to rely on acquisitions alone at Hewlett-Packard. It’s just the wrong thing to do. We have tremendous R&D capability here. And that’s how you really do be, what I would call, required evolutionary innovation. For the completely disruptive revolutionary innovation, certainly, we can look outside but we got a lot of runway with our own internal R&D capability if we run it right and invest in it right.

The shift away from M&A is a big one. HP has been a $35 billion deal-making machine during the last decade or so, absorbing companies as large as EDS, 3Com, 3Par and Mercury Interactive.

In a note to clients this morning, Brian Marshall, an analyst with ISI, compared the shift to a return to the garage where Bill Hewlett and David Packard started it all in 1939. “We believe HP has the talent and resources to turn itself around and it now comes down to leadership and execution.”

The one weakness, Marshall concedes, will be in software, which amounts to about 2.5 percent of sales, despite all those enormous software deals. If, as Whitman admits, certain software companies are “ready to move” in 2012, and cash-rich rivals are ready to pounce — Oracle has about $32 billion in combined cash and short-term investments; IBM $11.3 billion — the temptation may be strong to turn the deal-making machinery back on.

Meanwhile, investors are pretty clear in what they think: HP shares are down 4 percent this morning.

HP's Whitman: Time to Rebuild the Balance Sheet

Arik Hesseldahl — Mon, 21 Nov 2011 21:52:09 +0000

HP’s numbers are out, and while the quarter was better than expected — earnings were $1.17 per share on $32.3 billion in sales, beating the consensus view — opinions are split on the guidance. HP says it expects to earn “at least $4 a share” in 2012, which is probably an easy bar to jump over — but is it perhaps too easy?

Here are a few other highlights from the press release that will likely be called out in more detail on the call:

Personal Systems Group: This is the PC business that was briefly considered for sale or spinoff earlier in the year, before HP reconsidered. Revenue fell by 2 percent over the year-ago period, and operating margins were 5.7 percent. Business PC sales were up 5 percent, while consumer sales declined 9 percent. Total units shipped were up by 2 percent, with desktop machines growing by 5 percent and notebooks by 1 percent.

Printing: Revenue declined 10 percent year on year and operating margins were 12.8 percent. Commercial sales were up 4 percent. Consumer sales were down 8 percent.

Services: Revenue was $9.3 billion, up 2 percent year on year, with operating margins of 12.8 percent.

Enterprise servers, storage and networking: Sales declined 4 percent and operating margins were 13 percent. Networking sales grew 5 percent. Industry standard servers were down 4 percent, while Business Critical Servers were down a whopping 23 percent, in no small part because of the uncertainty brought on by Oracle’s decision not to develop software for Intel’s Itanium chip, a decision that is the subject of a lawsuit between HP and Oracle.

Software: Sales grew 28 percent and operating margins were 27.7 percent. Licenses and services grew 33 percent and 36 percent, respectively.

Cash flow: HP generated $2.4 billion in cash flow from operations in the quarter.

The conference call is set to begin at 2 pm PT/5 pm ET. I’ll be dialed in, and will fill you in as it happens.

2:01 pm: We’re a minute or two from the call getting underway. There’s what sounds like some Yanni music playing. And now some weird electronic thing.

Soon after the results were released, HP shares started to go higher in after-hours trading. But now, as I look, they’re headed down again.

And now the call is getting underway. Operator is doing her setup.

Steve Fieler is now running through the boilerplate, forward-looking statements, etc.

He has, however, just said that CEO Meg Whitman will be on the call.

2:05 pm: Here’s Meg. “We need to get back to doing what we do really well. … When I took this role, we set three goals: Deliver Q4, complete the PSG analysis and get Autonomy off to a good start.”

“In the last month, we’ve had hundreds of leads pass between the two companies. We’ve combined the HP software business with Autonomy under Mike Lynch and reporting to me.”

“As I travel, the one question I keep getting is, ‘What is HP?’”

Meg: We’re in the software business to deliver value to our customers, not to transform HP.

2:08 pm: Now she’s talking about Project Moonshot as an example of “meaningful and exciting innovation,” and says to expect a boost in research and development spending in 2012.

Meg is reviewing 2011 to help people understand what was so difficult about 2011: We faced some challenges, some were in HP’s control; others were not.

First, we increased our investment, because there are levels where HP underinvested. This is why services revenue and margins came down.

We’ll also increase investments in IT systems and processes.

HP is a company known for execution. But we didn’t execute well in FY11. I’m a big believer in setting priorities.

We also confronted one-time issues like the Japan earthquake and the Thailand flooding. Finally, we had a CEO change, and many news cycles. Through this, we created confusion with many of our shareholders about what kind of company HP is.

Meg: Many of the FY11 headwinds are still with us. But we’re doing the hard work that will put the pieces in place for profitable growth in 2013.

No major acquisitions in 2012. We will be rebuilding our balance sheet.

2:15 pm: Here’s CFO Cathie Lesjak: Running through the numbers.

Gross margins were hit by the strong yen and difficulties with printer supplies.

2:20 pm: Interesting: Nine million Web-connected printers were shipped this quarter.

2:21 pm: We are seeing the macroeconomic slowdown impact industry-standard servers.

2:25 pm: The salesforce is ramping up to start selling Autonomy software in fiscal 2012.

Balance sheet: $8.1 billion in cash.

Channel inventories are a bit higher than we would like in some regions.

Outlook: Fiscal Q1 2012 and full year: We will be managing the business toward earnings performance. Here is some color and assumptions on revenue. The macro environment remains uncertain globally, particularly in Europe. Consumer is soft, and starting to see weakness in commercial spending. Business Critical Server will remain a headwind during the year.

We will continue to be focused on profitable revenue. First, the overall decline in revenue will impact margins at a company level. We are also seeing pricing pressure across the company at a transactional level.

We expect 83-86 cents non-GAAP in Q112. FY12, EPS of at least $4 on a non-GAAP basis.

Reiterating that statement Lesjak made a few minutes back: “The macro environment remains uncertain globally, and particularly in Europe. Consumer spending remains soft, and we have begun to see a slowdown in commercial spending. We expect these dynamics will lead to below-normal sequential revenue performance in Q1, and year-over-year revenue declines through 2012.”

2:31 pm: Time for Q&A. I missed the question, but it was about investments. Meg is answering about headwinds in all three regions. Thailand flooding will affect HP in Q1 and Q2 of 2012. We’re driving more organic innovation by boosting R&D. If we’re going to get out of the M&A business, we’re going to have to invest in R&D. We also have to invest in people who can deliver the products and services. Also expect an investment in sales force. Those are the three areas of investment.

2:32 pm: Lesjak: We think Thailand flooding problems on hard-drive availability starts to be alleviated after the first half of the year.

2:34 pm: Question from Katie Huberty at Morgan Stanley: Is the lack of revenue guidance to be more selective, or is it more a function of the visibility and disruptions you’re seeing? Also asking about places where HP can take share from others in 2012.

Whitman: The reason we’re not guiding to revenue: We want to manage the company to profitable growth. Our business-unit heads are focused on business mix. This company has always been focused on profitability. That is the reason we’re doing this. We’re going to report by segment, but no guidance on sales.

Lesjak on where HP can take share: Right now, our guidance is reflective of an uncertain economy. We think we can maintain or gain share in many segments.

2:36 pm: Question from Citigroup: Asking about the weaker environment in supplies. Is it a cyclical issue or a secular issue?

Whitman: I completely believe this is not a secular trend toward decline in printing. There is more information to print. In my view, this was all about correcting a channel problem. The slowdown in Q3 and Q4 was a surprise to us. What we know is that supplies is almost a perfect predictor of economic health in almost any region. I do not think this is a secular trend.

Question from Barclays about Industry Standard servers.

Whitman: We’re back to a more normal refresh cycle, but there’s going to be pressure because of the hard-drive supplies problem. Many companies who are building their own servers — like, say, Google — are calling us because they can’t get disk drives.

Whitman: The flooding in Thailand has been a personal tragedy. It remains pretty dynamic. I’ve been on the phone with heads of all four disk-drive partners, and they’re not sure when they’re going to be back up and running. We made strategic buys of drives. We will get more than our fair share. We were on this really fast. This is going to affect the industry pretty dramatically. There are going to be shortages in Q1 and Q2.

Lesjak: We have tried to capture this uncertainty in our EPS guidance. I think what’s going to be key for us is investment in innovation. What’s going to keep people from building their own servers is the kind of thing HP brings to the table.

Whitman: We’re excited about Project Moonshot, which will change the game in the industry.

Question from Toni Sacconaghi at Bernstein: You are placing more emphasis on the tougher macroeconomic environment. You seem to be saying you will be more affected than some other companies. Most companies are coming slightly below normal seasonality; you came in well below normal seasonality. Some simple benchmarking would suggest you are losing some share. Do you believe you are as competitive as you ought to be? Or was there damage to the brand?

Whitman: As you look at 2011, there were three buckets of problems. One-third was macroeconomic trends. Consumer was weak for us, and commercial segment was weak in Q3 and Q4. Other third was HP-specific. We were hurt in China from the Nivida recall and Intel recall, and the mid-August announcement hurt us in China more than in any other market. I had some customers tell us they thought we were getting out of hardware entirely. We didn’t perform as well as the industry.

The other third was the distraction factor. We just need to get back to putting our heads down and ending the drama here. Going forward, we’ve still got macroeconomic headwinds. I don’t think anyone knows what’s going to happen in Europe.

2:46 pm: Whitman: We’ve got work to do in each and every one of our businesses.

2:47 pm: A question on capital allocation, also from Toni at Bernstein. If you’re going to generate $8 billion to $10 billion in cash, you could return more in buybacks and still exit the year better than before. Why can’t you be more proscriptive on buybacks?

Lesjak: We’re always evaluating best options for cash for short and long term. In the midterm, we really want to build back our balance sheet. We have a lot of debt. We don’t want to get ahead of ourselves on this one.

2:49 pm: Keith Bachman at Bank of Montreal: How is HP thinking about revenue growth and margin implications as it goes through the investment cycle? Also about getting the services business back to where it needs to be.

Lesjak: Success in services will be measured in years versus quarters. At the same time we’re doing that, we have to review everything in the portfolio to make sure we’re offering the right services. This is a very big business. In 2011, we are making investments in tools and will accelerate them in 2012.

2:52 pm: Question from Scott Craig of Bank of America: You mentioned a long tail about services. Provide a little more color on what a long tail is. Also, when do you see the drops in business-critical servers?

Whitman: BCS is a business in decline. It’s a slow decline.

Lesjak just mentioned some DEC servers, Digital Equipment Corp., which HP acquired some years back. HP is still selling them and servicing them.

2:55 pm: Whitman: We may make some small acquisitions, but we’re not going to do any big acquisitions in 2012. This is a reset and rebuilding year.

One of the things I have been struck by is that we have a fantastic portfolio of assets. We just have to make them work harder.

2:56 pm: Question: What do you consider large?

Whitman: Sub-$500 million. We might get up to $1 billion, but I doubt it.

2:58 pm: Whitman talking about possible acquisitions again. There are a few assets that may be ready to move in 2012. There may be two or three we take a look at in the software space. If there is a great acquisition that is in the $1 billion range but we don’t want to pay too much for it. I have a history of using acquistions to grow companies, but we can’t continue to rely on them to grow acquisitions at HP.

3:01 pm: Last question: Shannon Cross of Cross Research. Asking about Autonomy and linearity during the quarter.

Whitman: I am really excited about the acquisition. It really positions HP well. It enables HP to manage unstructured information in a way that no one else does. Autonomy is running autonomously, but we have done a great job of integrating going to market. We have a clearinghouse that vets all the sales leads. This will enable Autonomy to grow a lot faster than it would have on its own.

3:04 pm: And we’re done.

HP Beats the Street, but Guidance for 2012 Is Weak

Arik Hesseldahl — Mon, 21 Nov 2011 21:23:39 +0000

Hewlett-Packard managed to maintain its long-running streak of beating the expectations of Wall Street analysts — now 26 of the last 27 quarters — with an earnings report that bested the consensus by four cents.

Earnings per share were $1.17, versus the consensus of $1.13, on sales of $32.3 billion, also slightly ahead of the consensus.

However, the guidance looks weak. HP said it sees fiscal year 2012 earnings coming in at at least $4, well below the consensus of $4.56, and not really even in the “just right” territory that I wrote about this morning.

“We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution,” CEO Meg Whitman said in a statement.

HP shares took a beating today, but so did the rest of the market. HP closed down more than 4 percent at $28.84. The shares are down more than 36 percent since the start of the year.

Here’s the full earnings news release:

PALO ALTO, CA–(Marketwire -11/21/11)- HP

Fiscal 2011 non-GAAP net revenue of $127.4 billion, non-GAAP diluted earnings per share of $4.88 and free cash flow of $9.1 billion grew 1%, 7% and 8%, respectively, over the prior year

Fiscal 2011 GAAP net revenue of $127.2 billion, GAAP diluted earnings per share of $3.32 and cash flow from operations of $12.6 billion

Fourth quarter non-GAAP net revenue of $32.3 billion, non-GAAP diluted earnings per share of $1.17 and free cash flow of $1.2 billion were down 3%, 12% and 43%, respectively, from the prior-year quarter

Fourth quarter GAAP net revenue of $32.1 billion, GAAP diluted earnings per share of $0.12 and cash flow from operations of $2.4 billion

HP today announced financial results for its fourth quarter and full fiscal year ended Oct. 31, 2011.

“HP has a great opportunity to build on our strong hardware, software, and services franchises with leading market positions, customer relationships, and intellectual property,” said Meg Whitman, HP president and chief executive officer. “We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution.”

“While FY11 proved to be a challenging year, we grew non-GAAP EPS 7% and generated $12.6 billion in cash flow from operations,” said Cathie Lesjak, HP executive vice president and chief financial officer. “We’re remaining cautious heading into FY12 but are focused on delivering our earnings outlook and driving shareholder value.”

Earnings highlights

—————— —————————— ————————–
Q4 FY11 Q4 FY10 Y/Y FY11 FY10 Y/Y
—————— —————————— ————————–
GAAP net revenue
($B) $ 32.1 $ 33.3 (3%) $127.2 $126.0 1%
—————— —————————— ————————–
GAAP operating
margin 2.5% 9.9% (7.4 pts) 7.6% 9.1% (1.5 pts)
—————— —————————— ————————–
GAAP net earnings
($B) $ 0.2 $ 2.5 (91%) $ 7.1 $ 8.8 (19%)
—————— —————————— ————————–
GAAP diluted EPS $ 0.12 $ 1.10 (89%) $ 3.32 $ 3.69 (10%)
—————— —————————— ————————–
Non-GAAP net
revenue ($) $ 32.3 $ 33.3 (3%) $127.4 $126.0 1%
—————— —————————— ————————–
Non-GAAP operating
margin 9.7% 12.0% (2.3 pts) 10.8% 11.4% (0.6 pts)
—————— —————————— ————————–
Non-GAAP net
earnings ($B) $ 2.4 $ 3.1 (23%) $ 10.4 $ 10.9 (4%)
—————— —————————— ————————–
Non-GAAP diluted
EPS $ 1.17 $ 1.33 (12%) $ 4.88 $ 4.58 7%
—————— —————————— ————————–

Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below. Unless otherwise specified, all revenue amounts below are calculated on a GAAP basis.

Full year fiscal 2011
GAAP net revenue for the full fiscal year 2011 was $127.2 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. GAAP operating profit was $9.7 billion, and GAAP diluted earnings per share (EPS) was $3.32, down 10% from the prior year.

Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. Non-GAAP operating profit was $13.8 billion, and non-GAAP diluted EPS was $4.88, up 7% from the prior year.

Fiscal 2011 non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in the fourth quarter in connection with the wind down of HP’s webOS device business, net of fourth quarter webOS device revenue. Non-GAAP earnings and operating profit information excludes after-tax costs of $3.3 billion, or $1.56 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011
For the quarter, GAAP net revenue of $32.1 billion was down 3% from the prior-year period. Non-GAAP net revenue of $32.3 billion was down 3% from the prior-year period as reported and down 6% when adjusted for the effects of currency.

GAAP diluted EPS was $0.12, down 89% from the prior-year period. Non-GAAP diluted EPS was $1.17, down 12% from the prior-year period.

Fourth quarter non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in connection with the wind down of HP’s webOS device business, net of webOS device revenue for the period. Fourth quarter non-GAAP earnings information excludes after-tax costs of $2.1 billion, or $1.05 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011 trends and regional performance
In the Americas, fourth quarter GAAP net revenue was $14.5 billion, down 4% year over year and down 5% when adjusted for the effects of currency. Non-GAAP net revenue in the Americas was $14.6 billion, down 3% year over year and down 4% when adjusted for the effects of currency.

Europe, the Middle East and Africa GAAP revenue of $11.7 billion was down 6% year over year and down 10% when adjusted for the effects of currency. GAAP revenue in Asia Pacific was $6.0 billion, representing a 3% increase year over year, and down 4% when adjusted for the effects of currency.

GAAP revenue from outside of the United States in the fourth quarter accounted for 65% of total HP revenue. BRIC countries (Brazil, Russia, India and China) generated revenue of $3.8 billion, up 9% over the year-ago period, for 12% of total HP revenue.

Revenue in HP’s commercial businesses declined 2% year over year. Revenue in HP’s consumer businesses, within PSG and IPG, was collectively down 9% year over year.

Fourth fiscal quarter 2011 business group results

Services revenue of $9.3 billion grew 2% year over year with a 12.8% operating margin. Technology Services and Application Services revenue grew 3% and 2%, respectively, while IT Outsourcing revenue grew 1% and Business Process Outsourcing revenue declined 2%.

Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 13.0% operating margin. Networking revenue was up 5%, Industry Standard Servers revenue was down 4%, Business Critical Systems revenue was down 23%, and Storage revenue was up 4%.

HP Software revenue grew 28% year over year with a 27.7% operating margin. HP Software revenue was driven by revenue growth in licenses and services of 33% and 36%, respectively.

Personal Systems Group (PSG) revenue declined 2% year over year with a 5.7% operating margin. Commercial client revenue grew 5%, and Consumer client revenue declined 9%. Total units were up 2% with 5% growth in desktop units and 1% growth in notebook units.

Imaging and Printing Group (IPG) revenue declined 10% year over year with a 12.8% operating margin. Commercial revenue was up 4% year over year with commercial printer hardware units up 5%. Consumer printer hardware revenue was down 8% year over year with an 8% decline in units.

Financial Services revenue grew 18% year over year driven by double-digit growth in both lease volume and portfolio assets. The business delivered a 10.3% operating margin.

Asset management
HP generated $2.4 billion in cash flow from operations in the fourth quarter. Inventory ended the quarter at $7.5 billion, with days of inventory up 4 days year over year to 27 days. Accounts receivable of $18.2 billion was up 1 day year over year to 51 days. Accounts payable ended the quarter at $14.8 billion, flat from the prior-year period at 52 days. HP’s dividend payment of $0.12 per share in the fourth quarter resulted in cash usage of $239 million. HP also utilized $500 million of cash during the quarter to repurchase approximately 17 million shares of common stock in the open market. HP exited the quarter with $8.1 billion in gross cash.

Outlook
For the first quarter of fiscal 2012, HP estimates non-GAAP diluted EPS in the range of $0.83 to $0.86, and GAAP diluted EPS in the range of $0.61 to $0.64.

First quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2012 non-GAAP diluted EPS of at least $4.00 and GAAP diluted EPS of approximately $3.20.

Full year fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.80 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

In order to more effectively manage HP as one company and align its guidance policy with its long-term objective of delivering profitable growth, HP will only be providing a quarterly and annual earnings per share outlook. The company believes that earnings per share is a better indicator of successful execution across its various business levers. HP remains committed to high levels of disclosure and transparency, including general commentary on its expectations relating to future revenue and business segment performance, and will continue to provide detailed segment-level financial performance data for completed fiscal periods.

More information on HP’s quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at www.hp.com/investor/home.

HP’s Q4 FY11 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2011q4webcast.

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com.

HP's Look Ahead to 2012 Must Be Not Too Hot, Not Too Cold, but "Just Right"

Arik Hesseldahl — Mon, 21 Nov 2011 13:55:05 +0000

Hewlett-Packard will today report results for its fourth fiscal quarter and its 2011 fiscal year. It will be the company’s first earnings announcement under its new CEO Meg Whitman, who stepped in as CEO two months ago.

It will also be the first earnings release since the infamous fiasco of Aug. 18, when HP shocked investors with a truckload of news: The shutdown of the webOS hardware business, the now-concluded review of strategic options for the PC business, the acquisition of the British software firm Autonomy and a lowering of its revenue outlook.

The consensus of Wall Street analysts calls for HP to report sales of $32.1 billion and per-share profits of $1.16. At that level, sales growth would amount to about 3 to 4 percent on a sequential basis. Which, writes analyst Toni Sacconaghi of Bernstein Research in a note to clients on Friday, is substantially slower than the 8 to 14 percent HP usually grows sales in its fourth quarter.

HP consistently beats the consensus number — 25 of the last 26 quarters, by Sacconaghi’s count — so there’s a pretty good chance the company will do it again, despite an aggressive pricing environment for PCs, economic weaknesses in Europe and headwinds from the effect of currencies. When HP issued profit guidance in August for this quarter — the range was $1.12 to $1.16 a share — it implied that operating margins would be down by about 0.3 percent to up by 0.1 percent. This would be, Sacconaghi writes, the worst quarter-on-quarter change in operating margin since HP acquired Compaq in 2002.

Yet the results for the quarter are almost of secondary concern. All eyes will be on guidance that HP gives for 2012. It must be realistic, but not too low; achievable, so not too high. Guidance that Goldilocks could love — just right. HP has been lowering its guidance all year, but that was under prior CEO Léo Apotheker. The right number for EPS guidance in 2012, Sacconaghi says, is at least $4.25 a share, though he’s estimating HP will finish 2012 at $4.80, which is a reduction from his previous estimate of $5.15.

Also, it should set some clear priorities for capital allocation, Sacconaghi writes. HP took a lot of heat for paying $11.7 billion for Autonomy. Whitman has yet to set the table strategically for HP: Does it need more “transformation”? Or is it a mature company with slow predictable growth targets that routinely gives cash back to shareholders in much the same way IBM does? In choosing the latter, Sacconaghi says, HP could grow sales by at least 2.5 percent a year and per-share profits by 9 to 10 percent a year for the next three to five years.

HP can expect to produce free cash flow next year, in the range of $8 billion to $10 billion. If it were to buy back $4 billion worth of stock, it would reduce the share count by about 7 percent, and thus goose its EPS accordingly. One important signal on this front is the addition of activist investor Ralph Whitworth to HP’s board. Whitworth is likely to advocate the return of cash to shareholders and lean against big acquisitions.

Finally, there are lots of challenges in HP’s individual business units, none of them insurmountable. The printer unit is still recovering from the effects of the earthquake in Japan. Certain high-demand models are running short, yet there’s a lot of lower-demand models in inventory. Sacconaghi expects sales in the unit to drop 6 percent. In services, HP has had some problems delivering profit growth. Expect some explanation around that in the commentary today. In the PC business, expect some explanation of the effects HP is seeing from the flooding in Thailand which is causing a worldwide shortage of hard drives. In the Business Critical Server business, which is where HP sells its high-margin Itanium-based servers, the impact from the ongoing brawl with Oracle is making it difficult to close deals, Sacconaghi writes.

Overall, he insists that HP — despite its troubles over the last year — remains an attractive investment for patient investors. It still leads the market segments it participates in, except services, and still has fair room for growth. Sacconaghi rates HP as “outperform,” and expects it to hit a price of $37.

HP Has Meeting to Say It Still Doesn't Know What to Do With webOS

Ina Fried — Wed, 09 Nov 2011 01:00:42 +0000

It looks like employees of the webOS unit are in for another season of “The Waiting Game.”

Hewlett-Packard called an all-hands meeting Tuesday to tell the unit’s workers that it still doesn’t know what it is going to do with webOS, a source told AllThingsD.

According to The Verge, HP CEO Meg Whitman told employees that a decision is still some three to four weeks away.

“It’s really important to me to make the right decision, not the fast decision,” Whitman said, according to The Verge. “If HP decides to do this (keep webOS), we’re going to do it in a very significant way, over a multiyear period.”

An HP representative told AllThingsD the company had nothing to announce.

As we’ve noted, the company doesn’t really have any easy answers. Most of the would-be buyers have said privately or publicly (and presumably to HP, as well) that they are not interested. The OS, though praised for its interface, has suffered from neglect under current and past management, while rivals like Apple, Google and even Microsoft are moving full speed ahead.

Previous CEO Léo Apotheker had made the call to ax the webOS hardware, pursue strategic alternatives for the software and sell the PC business. Last month, Whitman said HP would keep the PC business, but also said the company had yet to finalize its plans for webOS.

HP acquired the unit with its billion-dollar-plus acquisition of Palm and at one point talked of putting the OS on every PC and on many of the printers it sells, not to mention cellphones and tablets.

I’m checking in with sources, and hope to have a bit more soon, though clearly there isn’t much new to say here.

Hewlett-Packard Close to Deciding webOS Unit's Fate

Arik Hesseldahl — Tue, 08 Nov 2011 19:52:31 +0000

The Verge is reporting that Hewlett-Packard has just called an all-hands meeting, led by CEO Meg Whitman, to discuss the fate of the webOS business.

News of the meeting comes after Reuters reported that, after exploring options for the unit, HP has been leaning toward a sale.

HP had shut down its webOS hardware business on Aug. 18, after sales of the much-ballyhooed TouchPad tablet failed to gain traction at major retailers.

The Reuters story listed several potential buyers, representing more or less the wishful thinking of HP’s advisers at Bank of America: Amazon, Research In Motion, IBM, Oracle and Intel.

I can knock two off that list: Oracle and IBM. I’ve checked with sources at both companies today, and they slapped down the idea of buying webOS from HP. Neither company would have anything useful do with it, other than milk webOS for patent royalties.

Intel might have made a sliver of sense, until it walked away from its own Meego mobile OS in September and instead threw in its lot with Samsung on an Android variant called Tizen.

That leaves Research In Motion, which has problems so numerous that an acquisition seems unlikely; and Amazon, whose flagship tablet, coming later this month, runs a version of Android.

HP Hires New EVP From Boeing, Names New CIO

Arik Hesseldahl — Thu, 03 Nov 2011 12:45:32 +0000

Lately I’ve been covering a lot of executive defections at Hewlett-Packard, because, well — given all the drama that has rocked that company in the last year or so — there have been a bunch of them. And when I write these stories, I like to use a great 1950s-vintage picture of a pilot in the ejection seat of a fighter jet (I found it on Wikipedia).

Now that there’s a new boss at HP — one who’s staffing up — I’m adding a new image: A paratrooper. After all, despite the fact that HP’s new CEO Meg Whitman is getting things at HP calmed down, there’s still some more drama to come. Anyone taking a new executive job is — by a stretch of phrase — “parachuting in.” Get it? And the parachute picture won’t apply just to HP, either — it also works for posts about other companies that are working through their own dramas. (Cisco Systems, I’m looking at you!)

Anyhow, the paratrooper image also works when you hear where the new guy comes from: Boeing. HP named John Hinshaw, the former vice president and general manager of Boeing Information Solutions, as its new executive vice president of Global Technology and Business Processes.

Hinshaw — who is, by my count, Whitman’s first senior hire since taking over as CEO last month — is 41, and will oversee HP’s information technology and administrative services. He’ll be in charge of procuring service and making sure all the business processes are running as smoothly and efficiently as they should be. It’s a big job, and as such, Hinshaw will be a member of HP’s executive council and report directly to Whitman.

In his previous position, Hinshaw was responsible for running Boeing’s high-growth businesses, which included delivering IT solutions to the U.S. government. Before that, he was Boeing’s CIO responsible for global IT strategy, operations, process and people. Before that, he was senior vice president and CIO at Verizon Wireless. And before that, he was a consultant at Accenture.

In the same announcement, HP also said that Craig Flower has been promoted to senior vice president and CIO. He’s been with HP since 1984 (so no paratrooper for him), and will report to Hinshaw. He’ll oversee data management, applications, global business intelligence and a bunch of other stuff. He’s held a wide range of IT positions within HP, including its e-business operations, customer and sales groups, and the all-important Personal Systems Group. If there’s a guy who knows what’s what at HP, it seems Flower would be it.

Update: As the commenter below just reminded me, Flower is taking the title held by former CIO Randy Mott, who left in HP’s big summer shakeup.

HP Has No Easy Answers for webOS

Ina Fried — Tue, 01 Nov 2011 17:00:48 +0000

Reversing course and keeping the PC business was a relatively straightforward decision for new Hewlett-Packard CEO Meg Whitman.

Indeed, when HP first announced its plans to jettison the business, I was racking my brain trying to think of another example of a company getting rid of a unit that was the biggest in the world at what it did. Nonetheless, had the company decided to sell or spin off the unit, it probably would have had more than a few options.

But, when it comes to what to do with webOS, the situation Whitman and HP face is a lot tougher. Though praised for its interface, the fact is that the mobile operating system has suffered from a lack of resources under both Palm and Hewlett-Packard. To thrive, operating systems need good hardware, masses of interested developers and a backer with deep pockets and long-term focus.

The most logical potential acquirers have clearly taken a pass — some of them quite publicly. HP could, of course, continue to fund webOS itself, though it continues to lose talent from that unit — most recently Richard Kerris, who headed the company’s outreach to developers.

Plus, it’s not like the mobile world is hurting for options. Apple’s iOS and Google’s Android are the obvious leaders, but Microsoft and Research In Motion are also in the game and neither can really afford not to succeed.

One interesting option — one that has circulated within HP, though has yet to win favor — is to simply give away webOS and its developer tools to the community, allowing it to be an open source alternative for mobile (and potentially other) devices.

Whatever HP is going to do, it had better act fast or the discussion will be moot. As Jack Ma recently noted of Yahoo, technologies that are neglected are like flowers that don’t get attention. They wither and die.

Can HP Still Deliver for Investors?

Arik Hesseldahl — Tue, 01 Nov 2011 12:59:21 +0000

With so many changes rocking the top managerial ranks at Hewlett-Packard during the last year, investors have punished the stock. About 18 months ago, HP shares were trading for more than $53. Today they’re trading at roughly half that.

Now that new HP CEO Meg Whitman has decided to keep the PC business rather than spin it out as her predecessor Léo Apotheker had proposed, HP appears to be heading back, however slowly, toward the kind of stability for which it had long been known.

But can it still perform? Bernstein Research analyst Toni Sacconaghi took the opportunity to examine the company’s business units and finds that, yes, the prospects for growth aren’t unreasonable. The current portfolio of HP’s business, he estimates, is likely to grow its sales organically by a combined 2.5 percent on an annual basis going forward. Add to that additional growth from the planned shifts toward higher-margin IT service, networking and software businesses, and the picture gets brighter, Sacconaghi writes in a note to clients issued yesterday. HP, he argues, should be able to grow its per-share earnings by 9 to 10 percent annually over the next three to five years.

Part of his assumption is that HP uses about $4 billion of its $8-$10 billion in annual free cash flow for share buybacks, which will help goose earnings on a per-share basis by reducing the number of outstanding shares; plus another $3 billion annually for acquisitions, buying companies at reasonable multiples of about five times revenue.

So how does each sector of HP’s business look?

PCs: Sacconaghi reckons that the global market for PCs will grow about 6 percent a year on a unit basis, down from historical averages of about 10 percent, and that it will grow on a revenue basis by about 2 percent a year through 2015. As the biggest supplier of PCs in the world, HP will, at the very least, hold its market share. While PCs are HP’s largest business, accounting for $40 billion in its last fiscal year and about one-third of its overall sales, the unit generates only 13 percent of operating profits. And, yes, while tablets are a threat, Sacconaghi sees no reason that PCs and tablets can’t grow together. The increasing need for an Internet connection everywhere and the increasing amount that consumers are willing to spend on technology, coupled with price declines over time, mean that consumers will be willing to spend more on notebooks and tablets.

Printers: As with PCs, HP is the market leader in printers, and as that market grows its revenue by about 3 percent a year, HP will probably hold on to its share of the market. Tablets may have a long-term impact on printing behavior, but Sacconaghi argues that consumer behavior tends to change slowly. A decade ago, he says, investors worried that email and the paperless office would kill printing. “Despite these ostensible headwinds, HP and Lexmark collectively grew their supplies revenues by 7 percent per year between 2000 and 2010, driving low to mid single digit growth for the printer industry.” HP’s printer division accounted for $25.8 billion in revenues in the last fiscal year, or about 20 percent overall, and because of its 17 percent operating margin, delivered 29 percent of the company’s profits. It’s a classic razor blade business, as HP loses between 20 and 25 percent on the printing hardware, only to make it up on supplies that command a 60 percent margin. The presence of tablets could actually boost printing, and thus increase the sale of those supplies down the road. Overall, the printer business should continue to grow at about 3 percent a year, Sacconaghi says.

Enterprise, servers, storage and networking: Sacconaghi expects HP to grow revenues in the ESSN unit by about 2 percent a year, slightly below the industry growth rate of 3 percent. He bases this on the expectation that HP can grow its networking business, hold its market share in the Intel-based servers, and lose share in its enterprise storage business to players like EMC and NetApp, and also lose share in the Unix storage business because of Oracle’s decision not to support the Itanium chip.

Services: This unit should grow by about 2 percent annually, slower than the market, which is growing at 4 percent. “We believe that outsourcing is a maturing business, and that EDS, which HP purchased in 2008, is and was an underperforming asset,” Sacconaghi writes. “As a result, we forecast HP’s outsourcing revenues to remain flat.” Expect it to grow in line with the enterprise hardware business, and along with the consulting business.

Software: The market research firm IDC expects the end markets for HP’s software to grow by 7 percent a year. If you assume that HP makes more software acquisitions, which Sacconaghi does, then you can reasonably predict its software revenue will grow by 10 percent a year.

So what’s the risk to all this? Leadership. “Ultimately, our projections for HP are predicated on the company choosing a disciplined financial approach to running the company that includes modest revenue growth, small and leverageable acquisitions, a strong operations focus, and high returns of capital to shareholders,” Sacconaghi writes. The last two CEOs who tried to “transform” HP — Carly Fiorina and Léo Apotheker — failed.

HP’s isn’t “broken,” but in fact offers a favorable risk for patient investors, Sacconaghi says. He rates HP shares as an “outperform,” with a price target of $37.