HP Needs to Shave Costs, Drive ‘Meaningful Innovation,’ CEO Says

HP’s cost structure “is not sustainable,” CEO Meg Whitman said during the company’s annual meeting Wednesday. For the last few quarters, operating expenses have been growing “faster than revenues,” she said. In Q1, revenue slid 7 percent while operating expenses grew by 6 percent, she said. While the company needs to invest in its businesses to drive meaningful innovation in what have become “very fast product cycles,” she said, “that’s pretty tough right now.” First, she said, “we need to create the capacity to invest through cost savings."

HP’s financial challenges began well before last September when Whitman took the helm, the former eBay CEO told shareholders. “Financial performance really started to deteriorate in the second quarter of 2010,” she said. Reiterating a theme she underscored in the last earnings call, Whitman said, “It took us a while to get where we are, and it’s going to take us a little while to get out.” She cited impact from the hard disk drive shortage resulting from 2011 flooding in Thailand, which wiped out “32 percent of the disk drive capacity worldwide,” the struggles of the “macro economy” and the “significant negative impact of the [value of the] yen.”

The HDD shortage was a major contributor to the 15 percent revenue drop in the company’s Personal System Group (PSG) in fiscal Q1, resulting in a “weaker performance than many people had expected,” Whitman said. That led to Tuesday’s announcement that the company is combining PSG with the Imaging and Printing Group in a cost-cutting move. The Imaging and Printing Group, “the lifeblood of the company,” saw revenue drop 7 percent due to declines in consumer and commercial hardware and inventory buildup resulting from low ink and toner sell-through, Whitman said. Commercial digital press and managed print services are “doing very well” but not developing fast enough to replace revenues “we're losing in the core part of the business,” she said.

Referring to HP’s heritage as being “founded on disruptive technology,” Whitman said the company needs to do “a lot more” innovating, both evolutionary and revolutionary. The latter “fundamentally creates new markets” and sets new standards in the business, she said. Disruptive innovation often comes through acquisition, but “in my view, we have relied too heavily on acquisition and not enough on organic innovation,” she said, saying any “selective acquisitions” will be done on a “much lower level” than the company has done in the past.

HP has “underfunded” R&D in recent years in many core businesses “just to keep ahead of our leadership position,” she said. Despite PCs, servers, hardware, networking and software being mature categories, “we have a lot more running room in these businesses,” she said. “We ought to be able to outgrow the markets in which we play,” she said: But the company also has to “place some bets” on disruptive innovation coming out of HP Labs and on R&D coming out of individual business units, and determine where it can “fundamentally change the name of the game.” She said there are “big changes coming” in printing, servers and other businesses, without explaining.

In response to a shareholder complaint about poor customer support for replacement printer heads, Whitman noted that the company has HP stores in Brazil, an emerging market where stores have been “remarkably successful.” Whether that model would work in the U.S. “we would have to see,” she said, saying the company is “working hard to improve” customer interaction on its direct website, hp.com. “There’s a much better job we can do” with presenting “compelling offers” bundling printers and PCs, and to make hp.com “a much better resource” for service and repairs for customers, she said.

Whitman said she wanted to want to restore HP’s luster as the “icon of Silicon Valley” by the time the company celebrates its 70th anniversary in 2014. A stockholder corrected her, pointing out that the company was founded in 1939 and would be celebrating its 75th anniversary in 2 years.