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.

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