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FEBRUARY 10, 2005
By Ben Elgin Can Anyone Save HP? [Page 3 of 3]
SOFTWARE LOSER. The biggest of those was forming a partnership with Intel (INTC ) to co-develop the Itanium processor as the brains for high-end servers. After half a decade of trying, Itanium has gained little ground. Meanwhile, HP stopped developing its own high-end processor, called PA-RISC. Now it's stuck slugging it out for share in the market for commodity servers that run on Microsoft's Windows -- where Dell excels. HP struggles just as much in software and services. Its tiny software unit lost $125 million last year on just $922 million in sales. It's highly unusual not to make money in enterprise software. In services it has a sizable but slow-growing maintenance and repair business, yet it has squeezed profits in an attempt to gain market share in managed services such as running corporations' it operations. Acting CEO Wayman said during the company's press conference on Feb. 9 that while the unit's revenues have been growing strongly, HP has to focus more on profits now. Even HP's gilded $24 billion printing business, viewed by many as the company's savior, faces a rising number of challenges. Since Dell jumped into the market in early 2003, it has quickly picked up market share in inkjet models, the low end of the business. During the first three quarters of 2004, Dell accounted for 13% of inkjet sales in the U.S., according to IDC. R&D EDGE. While still a fraction of HP's market share, it presents a troubling trend. A growing base of Dell printers means it could eat into HP's lucrative business of selling ink refills to existing customers. "Dell is on the radar. It's a big long-term issue for Hewlett-Packard," says Ken Smith, a portfolio manager at institutional investor Munder Capital. HP is betting that it can stay ahead on printers by pouring resources into its labs -- and innovating constantly. In time the company expects state-of-the-art printing technology to spread into new domains, with printers even being harnessed to spray out billions of precision-engineered semiconductors (see BW Online, 2/1/05, "HP Prints a New Chapter in Circuitry"). Though HP spends more that $1 billion on printer R&D, analysts question whether it can keep its edge. "They have the ability to carry it off, but not indefinitely," says Joe D'Elia of researcher iSuppli. The management ouster at HP gives the company a chance to rebuild trust with investors. During Fiorina's 21 quarters atop HP, it missed profit expectations eight times. Sure, that's better than the 21 quarters before Fiorina arrived. But it's also more than double the combined misses of IBM and Dell over the same period. "Investor credibility is a huge issue with HP" says analyst Laura Conigliaro of Goldman Sachs. Indeed, in 2004, HP's stock plunged 8%, underperforming virtually every one of its competitors. STUCK IN THE OLD WAY. The good news for HP? Even if the board clings to Fiorina's vision, the next CEO is sure to have a bold mandate for change within the divisions. That's sorely needed. Take the PC business. Before the merger, Compaq was making significant strides following Dell's efficient model of direct sales to customers. Yet when the companies merged, this initiative never won broad support. Why? HP couldn't aggressively push PCs and bypass retailers, when it needed their help to sell printers. The result: HP has stuck to the old industry model as it battles super-efficient Dell. HP's market share is eroding in PCs, and the division struggles to eke out a profit. If the new CEO hangs on to the $24.6 billion PC business, the boss is likely to move quickly toward the Dell model -- even at the risk of angering retailers. Should the direct-sales model sputter, the choices grow starker. IBM finally resolved the same issue in December, selling its PC division to China's Lenovo for $1.25 billion. CALM AND STABLE? More bold moves are needed in HP's enterprise business. While the company acquired more than a half-dozen small software companies in the past 18 months, it has balked at a bigger acquisition. Insiders say some board members were upset that Fiorina didn't more aggressively pursue Veritas Software, a profitable maker of storage software that was acquired by Symantec (SYMC ) in December. The bottom line is that HP lost money in software last year, despite it being one of the most profitable markets for most corporate computing rivals. "The software business is way behind what you'd expect from a company this size," says Goldman's Conigliaro. As HP embarks on a difficult transition, execs will be working hard to put forth an image of calm and stability. The company's business depends on it. Indeed, competitors from IBM to Dell to Sun will be highlighting HP's management turmoil as they compete on large corporate-computing deals. Even with longtime HP veterans, from Wayman to printers chief Vyomesh Joshi, sticking around, this promises to be a difficult task. "If somebody has a pen poised over a purchase order, HP doesn't want there to be a moment of hesitation," says Andy Butler, a vice-president at researcher Gartner. "The company will go to great pains to show the world that nothing is changing right away." While execs press forward with gritted teeth, the drama at HP seems to have come full circle. Six years ago, it was at another airport hotel in Chicago that directors hired Fiorina. But things aren't going back to where they started. Not a chance. She may be gone, but HP now carries the indelible stamp of Carly Fiorina.
 With Steve Hamm and Spencer Ante in New York and Robert D. Hof, Cliff Edwards, and Peter Burrows in San Mateo Elgin is a correspondent in BusinessWeek's Silicon Valley bureau
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