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HP Rides 'Hurd' to Get Over The Hump

Clint BoultonReporter's Notebook: The investor community winces when a big, venerable company fails.

There were plenty of anguished grimaces two years ago this month when HP released its third quarter 2004 earnings.

Let's count off the gruesome gaffes that lead investors to run from the stock to the tune of a 17 percent price plummet, shall we?

HP's  enterprise server and storage division fell flat on its face, with revenue down 5 percent year-over-year. This included a quarterly operating loss of $208 million. Ouch.

The company's business-critical server revenue plummeted a hefty 8 percent to $828 million, with sales in its Alpha and NonStop server lines down 32 percent and 25 percent, respectively.

And that wasn't the worst of it.

Storage revenue for the third quarter fell 15 percent year-over-year to $709 million, with the online storage division, including EVA and XP enterprise storage, suffering the largest loss at 23 percent.

Nearline storage, which includes the tape library business, lapsed 16 percent year-over-year.

That's failure, folks. That's enough to induce headaches, fevers and chills in the toughest investors.

Months later, HP's board ousted CEO Carly Fiorina, who had taken heat ever since she crossed the T's and dotted the I's on the Compaq deal.

Seeking someone a little more hands-on, HP brought in no-nonsense, turnaround-guy Mark Hurd from NCR.

What has Hurd done for HP?

Since he took the helm, he has streamlined the company and made acquisitions to improve HP's diverse portfolios, especially on the software front.

Let's run down what has happened since Hurd joined HP.

In June 2005, Hurd reversed a move by Fiorina, splitting up the Personal Systems Group (PSG) and Imaging and Personal Systems Group (IPG) into standalone units to improve their competitiveness.

A month later, he pledged to cut jobs as part of a multi-step turnaround process to provide a simpler reporting structure with fewer management layers and save a couple of billion dollars in the process.

Go up several frames to the most recent earnings quarter, reported in May.

Remember HP's Enterprise Storage and Servers (ESS) unit? It was once a weak spot.

It reported revenue of $4.3 billion, up 2 percent over the prior-year period. Nothing stellar, but it's on the positive side compared to two years ago, when it only took in $3.4 billion.

Server revenue grew 4 percent year-over-year, with blade revenue growth of 60 percent. Networked storage, the low point from Q3 2004, grew 8 percent, with the mid-range arrays starring at an increase of 46 percent.

In June 2006, HP fulfilled the next part of the turnaround plan, liquidating its global operations group and spreading it around to its business groups.

That move, along with several other reorganizations the company has made in the past year, will result in a lay off of 15,300 workers by the end of fiscal year 2006.

Three weeks later, HP pledged to shutter several hundred HP offices around the world and move their assets onto fewer core sites.

But for every bit that HP seems to be subtracting, it has been aggressively adding to its core hardware and software portfolios since Hurd took over.

In 2005, the company bid for Peregrine Systems and AppIQ on the same day, spending roughly $500 million to lay a nice foundation for asset and service management software and storage resource management applications.

Just a couple of weeks ago, HP announced a $4.5 billion deal for Mercury Interactive.

Many people may know Mercury as one of the handful of high-profile, high-tech companies currently choking on legal documents exposing illicit stock option backdating practices.

Ironically, it's also a slam-dunk in the governance software arena for customers concerned about compliance regulations. The Mercury deal will put HP on the map in software, doubling the computer maker's software revenues to some $2 billion.

Could you imagine the previous administration having the wiggle room to maneuver such a deal after the Compaq merger? We would have heard the screaming of the Furies, also known as HP's board of directors.

But wheeling and dealing isn't the only area HP is looking to fortify itself. There are other, albeit more subtle, hints of a nifty turnaround.

A day before that Mercury bid, HP reaffirmed its allegiance to storage systems at an event in Marlborough, Mass., unveiling details about a brand-new family of network storage machines for SMBs.

This SMB storage line is due to see the light of day in September, meaning we should hear about this again in a month or so.

Big deal, you say. So the company unveiled some products a little early.

Consider this then: Pre-announcements are rare in the industry because it means you're predicting your team's ability to execute under pressure and deliver a product.

I've been covering storage, server and software aspects of HP off and on for more than five years now, and I don't recall many looking-forward events, previewing what they expect to deliver.

I can tell you that executives sounded particularly uninspired in some of the pre-briefings I've taken about new products. If you can't get excited about your company's latest SOA software, or servers, what can you get excited about?

That wasn't the case last month in Marlborough, where the handful of HP executives expressed confidence in their ability to not only execute, but to compete and extend their shares of the market.

Even a basic, scantily detailed pre-announcement told me that things have changed at the company. It has moxie, chutzpah, guts. No glitz or glamour, but action and execution galore.

Net-net, HP and Hurd are rapidly doing things to help investors turn those grimaces upside down. I'm no Nostradamus but expect next week's Q3 earnings to underscore those moves.