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Hewlett-Packard’s need to return profit is showing cracks

Issue #0936/1 – Recent reports in the press and in Hewlett-Packard’s quarterly financial results and end of year round-up indicate that the company is putting its shareholders, and pressure from Wall Street, above the welfare of its staff and customers, to the detriment of its business. Supply of printers has not met demand and EDS staff in the UK are reported to be planning a strike, as has already occurred in Germany.

A chart presented in its Q4 financial results summary revealed that Hewlett-Packard, as the leading global IT company, was the only major company that experienced a definitive acceleration of it’s revenue downturn in Q3 of 2009 (rolling 4-quarter trend). The chart showed IBM (number two player) with a revenue trend that is levelling out, as it is for most other leading players.

Looking Hewlett-Packard as a whole, Q4 revenue was down 8.3% year-on-year and considering the Imaging & Printing Group (IPG) specifically, revenue was down 15% year-on-year and inventory in the channel was seriously stretched (impacting on revenue).

This would tend to suggest a company with serious problems. But:

  • IPG managed to push Operating Profit up by nearly 1% as a result of cutting costs by 15% – meaning that operating profit now represents 18.1% of revenue, up from 15.5% this time last year.
  • For the company as a whole, operating profit grew by 6.3% on revenue that fell by 8.3%, taking operating profit to 11.8% of revenue – an increase of 1.7 percentage points.
  • Rolling the whole company results through to what it means for shareholders, earnings per share for the quarter has hit an all-time high of $1.14 – up 10.7% year-on-year on this falling revenue (down 8.3%).

This earnings per share payout is totally unrepresentative of the company’s overall performance. Hewlett-Packard has been shedding valuable staff, freezing pay and decimating its ability to deliver hardware to its customers while shareholders pocket ever higher proceeds.

Executives talk in terms of “solid performance”, building for the future” and “reduced cost structure”. Where HP services (which includes EDS) and IPG are concerned, executives talk of “efficiency gains”.

Clearly, part of the “efficiency gains” and cost cutting within IPG has included reducing the number of printer and MFP units built, to the point where it has been unable to fulfil demand. Printer availability has been poor, especially where laser printers are concerned and this situation is unlikely to improve substantially in the coming months unless demand drops significantly – which the company would not wish to see! Hewlett-Packard says that it is attempting to catch up on channel inventory and is forecasting double digit growth in shipments for Q1 but, if this growth is just the result of finally shipping units that have been pre-ordered but not delivered, then it is a false indicator.

From the HP Services and EDS perspective, Mark Hurd says, “EDS is an enormous asset” and indicates that HP Services is forecast to produce strong growth in the coming months. According to the financial report, revenue from HP Services activities continues to grow steadily (up 8% year-on-year and one of only two parts of the business that are showing growth – the other being HP Financial Services), while operating profit has increased by 57%, and the group has experienced a number of major contract wins in the year.

And yet, “efficiency gains” in EDS have included: 19,000 job losses since being taken over by Hewlett-Packard a little over a year ago (on top of the thousands of jobs the company has cut in other areas over the past several years); those still employed have had to contend with a pay freeze: and, just to rub salt in the wound, it is reported that there is an overtime ban due to start shortly.

No wonder EDS staff are in the throes of strike action! They are not being rewarded for their success. In fact, they are being penalised for their success and are being forced to subsidise most other areas of the business.

Over the past year to 18 months, Hewlett-Packard has systematically cut spending across the business and this must be having more of a detrimental impact even than we can see here.

What effect does this have on customers? The economic downturn has been hard on everyone, globally. Orders and investment in equipment, including printers, have all suffered but the customer still expects to receive, and should continue to receive, a high level of service. Where they cannot find service fulfilment, the service provider’s reputation becomes tarnished.

Businesses have not been able to acquire the printers they need and, if customers cannot get what they need, they are likely to turn elsewhere – Hewlett-Packard is not the only printer manufacturer.

Furthermore, if EDS staff do escalate strikes further, there will be implications for customers (some serious) because many of these EDS staff members work on customer sites – such as the UK’s Department of Works and Pensions. If staff are treated badly while seeing shareholders benefit, they will not deliver the level of service the company relies in for its reputation.

This second situation can be compared to the anger currently being vented against bankers, who caused the recession in the first place, and who are still pocketing (or threatening to pocket) huge bonuses while unemployment levels continue to rise and individuals lose their homes!

What does this mean for Hewlett-Packard? Well, the executives are very bullish about the future, forecasting high unit sales growth for IPG, with a reduced cost structure, and strong growth for EDS and HP Services but a company is nothing without its employees – a company IS its employees.

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