HP Tries to Jump-Start Growth

Looks as though the rumor of Hewlett-Packard's (NYSE: HPQ  ) layoffs turned out to be true. Along with its second fiscal quarter earnings, the IT giant announced that it would cut its workforce by approximately 27,000 employees worldwide. But will these cuts really help?

A long way to go
Well, it's a step in the right direction, but it may not be enough. On an annual basis, the company claims it would be able to save about $3 billion to $3.5 billion by 2014. It plans to use these savings to conduct research and development in cloud computing, data, and security.

But in my opinion, competing with the likes of IBM (NYSE: IBM  ) and Cisco (Nasdaq: CSCO  ) , both of which already have significant expertise in enterprise data center and cloud computing, would be quite a challenge for HP. Bottom line, the company needs a lot more than just layoffs to solve its problems. Instead, it needs to start innovating to reduce its huge dependence on low-margin, low-growth consumer hardware.

The numbers
HP's quarterly revenue fell about 3% from the prior year period to $30.7 billion. Net income took a much larger haircut of 31% to $1.59 billion. Though both numbers came in higher than what analysts at Thomson Reuters expected, HP's third-quarter earnings forecast fell short of analyst estimates.

The fall in revenue was mainly due to weakness in the company's imaging and printing division, which saw a 10% decline due to weak demand. But this decline was in part offset by HP's software division, which saw a remarkable 22% growth from last year thanks to a big software-as-a-service testing deal the company managed to sign up in Europe. However, Autonomy, the company it bought last year, came out with some disappointing numbers, and HP accordingly made a change in the division's leadership.

PC pangs
All companies in the PC industry have been taking a hit, thanks to the cannibalizing effect tablets have had, especially from Apple (Nasdaq: AAPL  ) . Tablet shipments are projected to almost double this year, while PC sales for the industry as a whole are projected to grow by just 4.4% this year.

But like rival Dell, HP is also planning to unveil tablets running on Microsoft's (Nasdaq: MSFT  ) Windows 8 operating system. So investors can only hope that move will add a good source of revenue. However, the tablet's success will largely depend on how well consumers and business receive Windows 8.

Keep it simple
But besides being a victim of the invasion of tablets, HPs sheer size seems to be another problem. With huge operational dimensions come the negative characteristics of sluggish decision-making, bureaucracy, and duplication of roles and effort. To her credit, Meg Whitman is on the case, trying to simplify HP's organizational structure starting with her decision of merging the company's personal-systems group with its printing and imaging division.

The Foolish bottom line
HP had a rather tumultuous 2011, in which we saw its overpriced $11.7 billion acquisition of Autonomy as well as the unceremonious firing of then CEO Leo Apotheker. Today, the company seems to be going in the right direction under Whitman's leadership. Even though HP is showing some signs of getting better, I'd still remain cautious and wait on the sidelines for now.

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Fool contributor Keki Fatakia holds no shares in any of the companies mentioned in this article. The Motley Fool owns shares of Microsoft, IBM, Apple, and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple and creating bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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