Hurd's Mentality

Thanks to a favorable earnings period, several key product launches and newly announced programs in strategic technology categories, Hewlett-Packard's new CEO, Mark Hurd, appears to be off to a good start. But make no mistake: He still has his work cut out for him to turn HP around.

Despite a 7 percent increase in revenue, which totaled $21.6 billion, and a 9 percent rise in profits for the second quarter, ended April 30, several key weak spots plague HP in its storage, and printing and imaging businesses, among others, including software. "The way I look at it, behind each of these is a great opportunity for improvement, and you can expect to see us move quickly on some of these things," Hurd said during his first earnings call last month.

While he remains mum on specifics, it's clear that cutting HP's bloated cost structure is a key priority. "Right now, we are reviewing every element of operations and cost structures, and nothing will be taken for granted," he told investors. "We will take the necessary steps to drive a performance-oriented culture across our company."

Hurd appears to have focused his early days on rallying key managers and executives. So far, the executive ranks appear to be on board. Even those loyal to ousted chairman and CEO Carly Fiorina believe Hurd has the wherewithal to fix HP's woes.

"You'll see him make some bold moves, but he's not going to do anything haphazardly. He's going to think things through" says Kevin Gilroy, senior vice president and general manager of HP's worldwide SMB segment, who has already spent time with the new CEO.

Gilroy, himself, is in the hot seat to prove to Hurd that he can grow HP's SmartOffice initiative, the company's effort to provide integrated solutions for SMB customers. While HP is a leading player in the SMB segment, the company is looking to accelerate growth. To do so, HP has been unveiling new solution sets and programs. Some of those efforts, however, are falling on deaf ears.

For example, last month when HP broadened its business-continuity solution offering, company officials acknowledged that they needed to do a better job of getting the word out; toward that end, this month HP is launching a worldwide seminar series.

"The issue is nobody knows about these [products and services] on the availability side," says Lisa Wolfe, HP's worldwide SMB business protection marketing manager.

At the same time, HP is aggressively rolling out new products and services, including a subscription-based desktop-management service and low-cost storage gear that is suitable to smaller business.

When it comes to storage, however, the SMB market is just a slice of HP's problems. Across all segments, storage remains the company's Achilles' heel. "We have issues in storage," Hurd said candidly. "We have not made enough progress in building out our specialist sales force, and we are not closing enough deals in the field. We have a lot of work in storage to do to get this business back."

In fact, HP reported storage revenue of $825 million, a decline of 6 percent over the same period last year. "We certainly have to improve our profitability in the storage business as we move forward," Hurd said, adding that the launch of nine new products and service packages should put the company on a path to achieve those objectives.

Among the new products launched was a key update of its midrange Enterprise Virtual Array (EVA) line, as well as products that filled some holes in its storage portfolio. Those include a high-end NAS platform that the company says is less expensive than that from EMC and Network Appliance; the company's first virtual tape library, a popular means of backing up systems on low-cost disk that emulates tape; and a new midrange tape library.

"HP needed to be more competitive with EMC and NetApp, and this puts them back in the game," says Tim Joyce, CEO of Roundstone Systems, an Alameda, Calif.-based HP partner. "They realized they were out of step and decided to come back with a bang."

But will the new EVA line and the other wares be enough to put HP back on the storage map?

"It's not really a product issue; I think it's execution," says Nancy Hurley, a senior analyst at Enterprise Strategy Group. "The key is getting the server folks, as a whole, to talk about storage." IBM and Sun are struggling in the same way, she adds.

Stephanie Balaouras, an analyst at the Yankee Group, says HP's efforts to upgrade its field sales force will be critical. "What HP has lacked recently is field-level expertise," she says. "It's hard to take a generalist and expect [it] to compete against an EMC sales engineer."

Under the Microscope

While Hurd is scrutinizing HP's storage business, the company's lucrative printing and imaging business also is under the microscope. Revenue from its printing and imaging group increased 5 percent, totaling $6.4 billion. Profits were up only 12.7 percent, or $814 million, impacted by price cuts made earlier in the year. Hurd said the pricing actions were necessary to keep HP competitive. Canon, Dell, Lexmark, Sharp and Xerox, among others, have all refreshed their printer lines with products, many of which outpaced HP on the price-performance curve.

So, just as the company refreshed its storage line, HP rolled out a slew of new printers. Among them are the color LaserJet 2600n printer. Priced at $399, HP said it boasts speeds of up to 60 percent more than existing color lasers. HP also added the new DeskJet 9800 Series, a high-speed, wide-format inkjet printer that produces 4,800-dpi outputs; the DesignJet 70, targeting retail users, design schools and even computer-aided design users; and the HP Color LaserJet 2800 All-in-One series of multifunction printers.

HP is fighting to boost profitability in its printing and imaging business with huge cuts, including staff reductions and exiting the high-end copier business it entered two years ago with much fanfare. Despite that latter pullback, rivals are not counting HP out yet.

"We don't tend to think HP is never going to be back," says David Bates, director of product marketing for Xerox's office products group.

Suffice to say, the industry will be watching closely to see what bold moves Hurd will make. "We are working as quickly as we can," Hurd told investors. "We are in a sprint to get the company in shape to go run a marathon." *