2HRS2GO: HP remains too spread out

COMMENTARY -- The restructuring of Hewlett-Packard (NYSE: HWP) hasn't gone far enough.

That appeared increasingly evident over the course of this morning's conference call for the HP's wreck of a fourth quarter report. HP wants to be an end-to-end IT vendor, but by its own admission hasn't managed it well.

Not everything was HP's fault. Currency problems are hitting every vendor. Other printer companies have reported a slowdown in sales of high end laser printers. HP's Superdome servers just launched and weren't scheduled to ship in volume until January anyway.

However, expenses rose an astounding 17 percent -- far above the company's expectation of 9 to 12 percent growth -- as October selling costs spiked along with sales. And despite those higher sales, some segments underperformed, especially software.

For the most part, Fiorina made no effort to sugarcoat the quarter; kudos to her for at least that much.

"All of these issues, which were exacerbated by the extraordinary October sales performance, were hard to see coming, but raise legitimate questions about whether we have sufficient visibility on our business," CEO Carly Fiorina told analysts.

Still, it's troubling to find out that management basically didn't pay enough attention during the quarter. "There is no one overriding cause, but rather a confluence of six or seven things that taken separately are all manageable," Fiorina said.

She cited several moves to improve the bottom line, including new financial monitoring systems, reviews of HP's hiring policies, changes to investment tactics and management. But this is the second straight report with results that were questionable -- you may recall the company's contentious third quarter, when HP claimed higher cash EPS than analysts saw.

It also sounds like HP executives let the PricewaterhouseCoopers deal distract them. "In hindsight, I let the PWC opportunity linger too long," Fiorina said. "I recognize that a number of you verbalized your concerns over the past few weeks, and others simply voted with their positions in the stock. ... I realize you made some valid points."

All in all, HP presented the picture of a company trying to do too many things at once. Selling software. Low- to high-end computer systems. Printers. Imaging systems. Consulting and services.

Not to say that it can't be done. Just ask IBM (NYSE: IBM) CEO Lou Gerstner, who oversees a far larger operation than Fiorina's empire.

However, Gerstner has advantages not available to Fiorina. Expectations for Gerstner were low when he took over Big Blue, which let him get away with relatively low revenue growth, on a percentage basis. IBM has more resources to draw on than HP. And when IBM launched its resurrection on the back of services, there was far less competition in the IT services and consulting market

Fiorina was brought in with a much more aggressive mandate, in a far more competitive market than Gerstner faced seven years ago. Even today, Fiorina still believes HP can manage 15 to 17 percent revenue growth.

That's hard to believe at this point, especially considering that more focused companies with a long history of earnings reliability -- Dell (Nasdaq: DELL) stands as the prime example -- are having a hard time meeting their targets. Fiorina, in the meantime, has now stumbled for six months, especially in the higher margin areas that provide much of the fuel for earnings growth.

HP executives today said the company's restructuring is ongoing. That's a change in tone from the third quarter, when Fiorina proclaimed that HP had turned itself around.

But even the latest moves don't seem enough. This latest conference call included at least a minute of dead air, as executives unsuccessfully searched for a very basic metric -- PC growth rate in Europe -- requested by one analyst. It gave the impression that management doesn't know all the details, which makes me wonder what else they don't know.

The first stage of HP's restructuring, begun under Lew Platt and continued under Fiorina, included the spin-off of various business that became Agilent (NYSE: A). After this call, it might be time to break up further. It is hard to run a huge, all-in-one IT operation, and even harder to run it well while increasing the top line sharply.

It's difficult to see how keeping printers and computer systems in the same company makes either segment better. And there's little evidence that a related consulting services unit helps the hardware business and vice versa, despite Fiorina's repeated assertion. If anything, IBM's sluggish hardware sales suggest that powerhouse consulting and systems revenue have nothing to do with each other at all.

Yet HP continues to pursue the dream of an integrated IT business. Things will get better, Fiorina & Co. insist.

They did say that HP is now in a "prove-it" mode. That much is true. 22GO

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