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.

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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.

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