What Hewlett-Packard Needs to Do for a Succesful Turnaround

HP needs to continue aggressively investing in newer technologies to break away from hardware. Job cuts alone won't get the job done.

Jun 3, 2014 at 2:33PM

In the course of just a few years, Hewlett-Packard (NYSE:HPQ) has been to the brink of disaster and back again. Its shares sat near $40 three years ago, then sank all the way to $12 apiece before climbing back to current levels around $33 per share. HP was hit hard by its reliance on hardware, including personal computers and printers. It has obviously come a long way back, thanks to significant restructuring, but the company's turnaround is not yet complete. HP's underlying fundamentals have trailed its share price recovery. While it's great to see HP shares trading much higher than they were at the depths of its crisis, it's premature to call the turnaround story a clear success. HP is still heavily reliant on PCs and printers, and those segments continue to drag the company down.

HP has taken some tough decisions to keep profits afloat, including significant job cuts. But, layoffs alone won't secure the long-term turnaround. In the post-PC world, the company needs to accelerate investments in new products and technologies like servers and the cloud, like Microsoft (NASDAQ:MSFT) did in its own efforts to break the chains of the PC. HP has begun this process, and it's off to a good start. If it continues, HP can truly become a global industry leader once again.

Printing is a problem
HP's printing segment posted a 4% revenue decline last quarter, which is problematic because printing is the company's third-largest revenue segment. Collectively, HP's revenue clocked in at $27.3 billion, down 1% versus the second quarter last year. That's obviously not an impressive performance, but it could inspire confidence if it indeed represents a floor.

In response to the ongoing lack of growth in its flagship printing segment, HP announced another round of huge layoffs. HP will cut up to 16,000 jobs as part of its turnaround efforts. These will boost profits in the years ahead. In fact, HP expects to generate $1 billion in annual savings from the job cuts.

However, revenue is the lifeblood of any company, and that's why HP's strategic investments in new areas, particularly the cloud, are far more vital to its turnaround efforts.

HP goes big on data, servers
On the second-quarter conference call, HP Chief Executive Meg Whitman assured analysts that sustained revenue growth is her top priority. To accomplish this, she pointed to several initiatives in new areas that will fuel the future.

One such investment is in the cloud; HP launched a new portfolio of products and services called Helion, which allows for seamless and secure integration of private, public, and managed cloud information at the enterprise level.

HP is also accelerating activity in servers; it created a joint venture with Foxconn to create a new line of cloud-optimized servers. By partnering with Foxconn, the two companies will be able to roll out products at high volumes. HP also revealed its Shark system, which allows for high-speed performance in big data. In this segment, HP has a product called OpenNFV, which provides telecommunications companies the ability to offer customers faster services at lower costs.

Servers and the cloud are exactly how Microsoft has engineered its own turnaround. For years, Microsoft was under pressure for being too chained to the PC on the software side. Fortunately, the company has rolled out a slew of cloud-based products and services that have allowed it to break the chains of the PC.

For example, Office 365, which is powered by the cloud, grew revenue by more than 100% last quarter. In addition, Microsoft realized double-digit growth in productivity server offerings such as Lync, SharePoint, and Exchange. The company also produced double-digit growth from SQL Server. In all, Microsoft generated strong 8% growth in adjusted revenue last quarter.

HP: Almost there, but a lot of work to do
After years of stagnating revenue growth, HP is getting proactive in its efforts to move away from PC hardware. For the most part, though, the company has resorted to job cuts as the primary way to keep profits afloat. While those cuts have buoyed earnings and helped get HP's stock higher again, the company's underlying fundamentals haven't kept up with its share price.

Fortunately, HP is responding to tepid revenue growth by investing in key areas that will drive its future, such as servers, the cloud, and big data. These new businesses will be its best hope to restore revenue growth, which is hugely important since cost-cutting alone can't last forever.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure-play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 TRILLION industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.


Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers