Poor Business Execution And HDD Shortage Blamed For HP Earnings Drop

Meg Whitman CEO HP

Hewlett-Packard CEO Meg Whitman faces lower revenue, profit and profit margins as she signals a long-term recovery process

Even IT companies need to upgrade their own internal systems every so often, and it looks like Hewlett-Packard – the world’s largest supplier of IT hardware, software and services by sales volume – may soon become one of its own best customers.

Admitting that it needs to improve its supply chain and general-purpose execution while struggling through a worldwide shortage of hard disk drives (HDD), HP reported on its Q1 2012 earnings call that its revenue, profit and profit margins were all down from the previous year.

Not ‘Matching Supply With Demand’

For the quarter ended 31 January, HP’s revenues of $30.0 billion (£19.1bn)was down seven percent from the same period in 2011. Net earnings of $1.6 billion (£1bn)were down 44 percent from $2.5 billion (£1.6bn)a year ago, and its average sales margin dropped from 12.4 percent to 8.6 percent in a year’s time.

“We were not as effective as we needed to be in matching supply with demand,” CEO Meg Whitman told listeners on the earnings conference call. “When you look at the whole picture from design to delivery, there are a lot of opportunities for us to improve.”

For example, Whitman said, HP “has under-invested in the upgrading of systems for the past few years. For years we’ve run our businesses in siloes, which adds complexity and causes things to run slower. We need to streamline our systems with new software and hardware and to standardise, optimise and automate wherever possible”.

This is precisely what HP’s sales force has been telling its customers and potential customers for years. Now the front office is looking in the mirror and realising it needs to undertake its own overhaul.

Whitman also said HP is carrying “far too many SKUs (stock-keeping units); we need to pare this down and simplify what we’re doing. We need to get back to basics as we continue building HP to last”.

Referenced several times on the call by Whitman and chief financial officer Cathy Lesjack were the unusually heavy monsoons that flooded Thailand last autumn. Thailand is a region that assembles about 70 percent of the world’s HDDs – many that go into virtually all of HP’s IT devices, whether for the consumer or enterprise markets.

Lesjack surmised that about half of HP’s seven percent drop in revenue could be directly attributed to the HDD shortage.

Without hard disk drives, all of HP’s hardware businesses literally spin to a complete halt. The company had stockpiled a fair number of HDDs for its servers, storage arrays, switches and consumer PCs, but there were not quite enough to handle demand, Whitman said.

“We had a few ‘ah-hahs’ happen to us in the worldwide supply chain, but we learned a lot from the situation about what not to do next time,” Whitman said. “We expect the shortage of HDDs to continue into Q2, but we also believe that this situation will work itself back to normal later in the year.”

HP’s stock was down 41 cents (26p) at $28.94 (£18.44) at the close of market on 22 February. It dipped a bit more by in after-hours trading to $28.59 (£18.22).