) is making good on her promise to squeeze efficiencies from the $21 billion acquisition of Compaq Computer Corp. She has moved faster than expected to slash the workforce--some 17,900 employees have been eliminated so far. By yearend 2003, she expects to finish shaving $3 billion from HP's expenses, a full year ahead of plan. Net income rose in the fourth quarter to $309 million from a loss of $505 million a year earlier, beating Wall Street expectations by 9%. And despite the departure four weeks ago of HP President Michael D. Capellas, Wall Street is warming to the company and has boosted its shares to $18, the highest level since June.
Now Fiorina's challenge, which could prove every bit as tough as the merger, is to drive growth. Here she has her work cut out for her. To make good on her vision of transforming HP into a towering colossus of technology, she faces a host of tough choices, from imposing wrenching changes on HP's sales model to gunning the company's cost-cutting efforts into overdrive. On some of these issues, Michael Capellas was pushing for quicker action (sidebar). With his departure, Fiorina faces less in-house pressure to hurry. But fierce competition is likely to force her hand, pushing an out-of-breath HP to run even faster.
Seven months into the computer industry's biggest acquisition ever, competitors are gnawing away at HP's market share in personal computers and servers. HP's revenue for fiscal 2002 is down 11%, to $72.3 billion. The decline is more than twice the 4.9% drop that Fiorina promised back in June. Here, HP trails its two chief rivals, IBM (IBM
) and Dell Computer (DELL
). Analysts expect IBM to finish the year with a 2.5% decline, while Dell races ahead by 20%.
Despite the bigger-than-expected revenue falloff, Fiorina insists that HP is prepared for Act II. She can already point to strong sales growth in printers. Earlier this year, HP launched more than 50 new printer models for the consumer line, along with a slew for businesses. The result: Operating profits jumped 89% year over year in the fourth quarter on record revenues that climbed 18%, to $5.6 billion. The division is running so smoothly that Fiorina has raised margin expectations for the new year from 11%-13% to 13%-15%. And printers now account for the bulk of HP's earnings.
To spark that kind of growth throughout HP, Fiorina plans to take on IBM. Her goal is to assemble HP's vast arsenal, which includes everything from printers and handheld computers to servers and storage, into package deals for corporate customers. She claims that HP, with its raft of technical partnerships, will give customers a broader choice of suppliers than IBM, which sells loads of its own wares. "We are going on the offensive," Fiorina declares.
The CEO is launching her blitz, however, with the gas tank only half-full. HP must convince big corporations that it is a powerful alternative. That may be hard, considering all the coughing and wheezing coming from HP's corporate computing business. The division of the company that makes high-end servers, storage devices, and software to manage corporate data centers remotely has lost $574 million in the past six months. Fiorina insists all the laggard businesses will be profitable by the middle of next year, or face more pruning.
HP trails IBM in size and scope when it comes to such areas as service skills and software. What's more, HP is now facing a delicate balancing act: It must keep customers from jumping ship as it phases out three proprietary server lines over the next two years to get behind Intel Corp.'s (INTC
) still-unproven Itanium chip. "They still have a lot of work to become a mover and shaker," says Goldman, Sachs & Co. analyst Laura Conigliaro.
Take the market for servers, which are typically run round the clock to tackle critical computing tasks. HP hopes to save hundreds of millions of dollars on developing its own high-end server chips by switching to Intel's Itanium chip. While Dell and others are likely to follow, Fiorina argues HP will have first-mover advantage.
And it will have a leg up in engineering, since it worked with Intel on the chip's development. But now, this HP division is moving in reverse. Researcher IDC says that, while in the three months ended in September HP accounted for 32% of the $4.3 billion market for Intel-based servers, its revenue dropped 7%. Meanwhile, IBM, which tweaked its servers for better performance, boosted revenue by 22%. And Dell, offering low prices, saw sales rise 8%.
The Dell threat should not be taken lightly. The Texas computer maker announced plans on Dec. 9 to plunge into service offerings for small and midsize business customers. For as little as $199, Dell says it will assess a customer's network and offer advice on setting up new servers, storage, and technical support.
And next year, Dell could be in a position to deliver a real body blow to HP. That's when the Round Rock (Tex.) company will begin selling printers and ink cartridges from Lexmark under the Dell label. It's all part of Dell's bid to take a bite out of HP's cash-cow printing business.
Fiorina swats away talk that Dell is HP'S major competitor. Instead, she focuses on IBM. So far, she hasn't had much luck duplicating Big Blue's success. In a Merrill Lynch & Co. survey of corporate tech managers published on Dec. 6, HP comes off badly in an increasingly vital market. Chief information officers say that HP's support for hardware and software based on open standards trails that of IBM and Dell.
The trouble is, customers will view HP as a printer and personal computer company--not a maker of powerful servers and services. Consider a deal it landed with Home Depot (HD
). In October, HP was awarded a contract to supply 40,000 Compaq Evo PCs. Not bad. IBM, however, walked away with the sweeter part of the agreement. Big Blue won a long-term contract for pricey servers, along with software to help Home Depot analyze data on sales, products, services, store performance, and customer buying patterns.
With technology spending expected to gain steam in the second half of next year, HP's rivals are positioned to race ahead. To make good on her ambitious goals for HP, Fiorina will have to race faster. By Cliff Edwards in San Francisco