San Francisco: As the computer industry makes a radical shift to new modes of computing—in the cloud and on tablets and smartphones—Hewlett-Packard Co. (HP), a stalwart of the previous era, finds it hard to keep up.
It is not alone in that struggle. HP, along with well-established tech companies such as Dell Inc. and Cisco Systems Inc., is contending with a faster-than-expected move by consumers and businesses from personal computers and small racks of computer servers towards mobile phones and tablets that are connected to millions of servers, all lashed together in remote supercomputing “clouds”.
The new systems are cheaper and more flexible, which businesses found appealing in a slow-growing economy. As for consumers, they have been dazzled by the new devices and abilities of those devices enabled by the cloud.
Realignment strategy: The HP logo displayed outside the company’s HP Enterprise Services unit in Plano, Texas. The firm said it would cut its ranks by 27,000 employees, or 7.7% of a global workforce of 349,600. Photo by Mike Fuentes/Bloomberg.
So far, however, the industry shift has rewarded upstarts such as Amazon.com Inc., which has become a premier cloud provider to business, and Apple Inc., which reinvented itself with smartphones and tablets. The old guard in enterprise computing, particularly HP, has struggled with a new technology order that squeezed profit margins and made many older products unattractive.
This was obvious on Wednesday, when HP reported revenue and net income below year-earlier levels, although both exceeded Wall Street’s expectations.
HP said it would cut its ranks by 27,000 employees, or 7.7% of a global workforce of 349,600. Many of the jobs are in the US. HP hopes to save as much as $3.5 billion a year from the restructuring, most of which it would put toward cloud-based businesses, such as computer security and analysis of large data troves.
Wall Street applauded the results. Shares rose 9% in after-hours trading. HP’s chief executive, Meg Whitman, however, warned that real success was a long way off.
“We?don't?aspire?to have a 3% decline in revenue,” she said in an interview after the earnings announcement. “There are big changes going on, and we have to position ourselves.”
She also vowed that HP, which had revenue of $127.2 billion in its last fiscal, “will be much bigger”, both in employees and revenue. She did not provide a timeline, however.
HP, headquartered in Palo Alto, California, reported net income in its second fiscal quarter, ended 30 April, dropped 31%, to $1.59 billion, or 80 cents a share, from $2.3 billion, or $1.05, in the period a year ago. Revenue fell 3%, to $30.69 billion.
HP’s results followed similar news from its archrival Dell on Tuesday. That computer firm reported that its first fiscal quarter's net income fell 33%, to $635 million, while revenue slid 4%, to $14.4 billion.
Dell reported a 12% decline in consumer revenue, and smaller declines in both business and government sales. Dell’s stock plunged 17% on Wednesday on the earnings report—which, unlike HP’s, came in below analysts’ forecasts.
Earlier this month, Cisco reported a 22% increase in net income after its own corporate restructuring over the last year, but warned of falling demand, in part because of Europe’s faltering economy.
Whitman, whose company makes computer networking gear too, also said she was troubled by Europe.
She said HP “has an opportunity in cloud that no one else does”. It is still among the world’s largest providers of servers and data storage systems for privately run clouds, used by companies not comfortable with having their data on commodity systems such as Amazon’s. Sales of advanced storage and networking systems rose rapidly.
Software delivered over cloud computing is typically less profitable, since it is effectively rented cheaply, without a lucrative service contract. “We have an advantage, because we are not running a $30 billion business, just $5 billion,” she said, arguing that Wall Street would punish traditional software companies more.
Of all HP’s competitors, International Business Machines Corp. (IBM) has fared best in the transition to the mobility and cloud world. IBM has bet billions on the cloud-based business of big data analysis. In its most recent quarter, however, IBM reported flat sales but improved profits because of tight management.
Whitman, who took control of the firm last September, said HP had to reposition itself quickly, but also said it would have enough time, since its largest corporate customers would move gradually to full cloud computing. “We’re not lagging in the transition to the cloud,” she said. “The enterprise changes slowly.”
A.M. Sacconaghi, an analyst with Bernstein Research, said he expected the change would come slowly. “It’s going to be a PC, printer and enterprise hardware company. Can they build that up to resonate more with what customers are buying today? Yes. In five years, will you see a new $20 billion line of business? No.”
Sacconaghi said HP could, over the long term, grow at 2%. With tighter management, that could make it a very profitable big company in the new world.
He said Whitman was out to change HP without putting it through a traumatic transformation, unlike previous recent chief executives such as Carly Fiorina and Leo Apotheker. Mark V. Hurd managed the firm tightly rather than radically, though he too was pushed out.
“CEOs who try to transform HP end badly,” Sacconaghi said. “CEOs who embrace the company, like Hurd and so far Whitman, do considerably better.”
©2012/THE NEW YORK TIMES