HP Makes Like Lazarus

A year after Carly Fiorina's ouster, the latest numbers show CEO Mark Hurd has the outfit humming. Can he keep the revival going?

It's been a year since Carly Fiorina was ousted from Hewlett-Packard (HPQ), and the high-profile executive is now writing a book, due to be published later this year, on her business experiences. No doubt, she'll use the tome to defend her tenure at the helm of the PC and printer giant, probably arguing that her hard-won and sometimes-controversial moves set the stage for the success of the man who followed her, Mark Hurd.

She'll be partially right. As with Presidential politics, success in corporations often depends on the state of the business a CEO inherits. And Fiorina had begun making progress in some areas. But judging from HP's quarterly earnings announcement on Feb. 15, many analysts say Hurd deserves the lion's share of the credit.

Hewlett-Packard blew past Wall Street's expectations by posting profits of $1.23 billion, on sales of $22.7 billion. That was a 30% increase in earnings on respectable 6% sales growth from a year earlier. The reason: a slew of operational, managerial, and cultural changes that have reenergized the company.


  The longtime laggard posted operating profit margins of 7.5% -- bringing it close to the 8%-plus territory long occupied by rivals such as Dell (DELL) and IBM (IBM). "You can't hand over the keys to the kingdom just yet -- but you can show him the box they come in," says Goldman Sachs (GS) analyst Laura Conigliaro. "There are just so many changes that have taken place, in style and substance."

HP is, in many ways, an exact opposite of its former self. Under Fiorina, it gained a reputation for roller-coaster inconsistency. It sometimes surprised investors with better-than-expected sales or profit, but rarely both -- and in some cases, it suffered huge misses. And while Fiorina pushed ahead with sweeping strategic missions, Hurd's focus is far more on the nuts and bolts.

Plus, Hurd has made great strides in building HP into a more balanced operation. On the flip side, Fiorina's HP was almost entirely dependent on profit from printer-ink cartridges, which made up roughly 15% of sales. Now, however, three of HP's four key businesses -- printers, PCs, and corporate hardware -- are posting surprisingly strong earnings.


  In all cases, HP is doing a better job of balancing market-share goals with the need for profit. Earnings from the unit that sells servers and storage gear to corporations nearly quintupled from a year earlier, to $326 million. The most striking progress came in PCs, where HP posted operating margins of 3.9% -- the best quarterly performance in years and double the previous year. And it did so without giving up much ground to rivals.

The printer division also gave HP investors reason to smile. Its 14.9% operating margin was at the top of the 13-15% range HP had told investors to expect. Here's why: In recent quarters, the company has been slashing printer prices to regain share, so as to boost future demand for those hugely profitable ink cartridges. This strategy hit pay dirt in the quarter, as printer-supply sales grew 11%, the best performance in years.

"With growth like that in supplies, expect [the unit] to continue to hover around its current 15-percent operating margin," writes Ian Hamilton, an analyst with Washington, D.C.-based Current Analysis. After years of talk about expanding beyond desktop printers, HP finally is showing it could break into the vast market for commercial-printing gear. Sales of high-speed digital presses made by its Indigo unit grew 43%, for example.


  Insiders and analysts attribute the improved performance to a raft of Hurd-initiated changes. Thanks in part to a sales reorganization that went into effect on Nov. 1, HP is beginning to increase its "attach rate," whereby more customers buy not only a single HP product, but a suite of them.

The company is also taking better advantage of its place as the leading supplier of products to big tech distributors and resellers. "HP is more pragmatic and results-oriented than before," says Steve Raymund, CEO of distribution giant TechData.

Raymund says that before Hurd arrived, HP seemed more focused on executing Fiorina's strategy to boost the percentage of products sold directly to a customer, a la Dell, than on finding the most profitable combination. "For a company as large and diverse as HP, that has a very powerful set of channels, that was too simple-minded a strategy," he says.


  In Raymund's view, HP is doing a far better job of capitalizing on all of its sales approaches and clearly has momentum. Hurd "hasn't been there long enough to claim complete responsibility, but his influence has been pervasive and positive," he adds.

That influence is in other areas that had become sore points with HP's board during the Fiorina era. In recent years, directors had urged Fiorina to bring in more new blood. While Fiorina added only a handful of executives, such as HP Services chief Steve Smith, the outfit more recently has used new outside recruits to fill several key spots, including the head of a long-suffering software unit that just posted its second consecutive quarterly profit.

Plus, Hurd is making solid progress in ensuring that HP's managers embrace his call for operational discipline. He has pushed far more decision-making down to lieutenants -- but also ramped up his level of oversight to hold them accountable. "It seems like everyone I talk to over there has just been through a review with Mark," says one former HP executive.


  Insiders say Hurd performs detailed quarterly reviews, not only of the four major business units, but of particular product areas, such as notebook PCs, or TVs, and of geographic sales operations. Says one manager, "He's getting right down into almost every business, and making people feel at least responsible for their performance. Accountability will happen when they don't make their number for the first time."

The two-way communication is also on the upswing with Wall Street, as was clear during the Feb. 15 conference call with analysts. "There's a vast improvement in HP's credibility," says Goldman's Conigliaro. While some analysts felt Fiorina had a tendency to overpromise or sugarcoat bad news, they appreciate Hurd's bedside manner.

One example: When asked why HP's $15 billion services arm had declined by 2%, he didn't hesitate to say he was prepared to give up growth while the company cuts costs and boosts capabilities. This is being done to ensure it can meet customers' demands while also posting acceptable profit. "His answer was a crisp articulation of why they chose to slow down growth," Conigliaro says.

For all the praise, big questions about Hurd remain. To be sure, HP's growth strategy has been clarified in certain areas, such as enterprise computing and commercial printing. But the CEO must still prove he has the vision and boldness to make the big bets required for a $90 billion company to maintain brisk growth.


  "A lot of people think he's just a cost-cutter," says one HP employee. "He's a nuts-and-bolts guy, and we need that, but we also need a visionary." Says another executive: "Mark is the right guy at the right time for now, but I don't see him as someone who can give us long-term leadership. The board needed an antidote to Carly. That's what they have."

So what is Fiorina's rightful claim on HP's success over the past year? No doubt, she set many of the wheels in motion. She launched the operational makeover of the PC unit that's now paying dividends as well as initiatives to make sure the cash-cow printer group didn't become too fat and happy.

And while most analysts still question whether the massive merger with Compaq Computer in 2001 made financial sense, Fiorina surely will make a compelling case that HP would not be nearly as healthy today if it hadn't made that controversial move.

Still, judging from HP's performance in the past year, credit for much of the improvement lies squarely with Hurd.

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