HP ended fiscal 2006 at US$91.66 billion, which is quite a ways up from $56.59 billion in 2002. Profits went up, too. What changed?
Well, the company has grown. But it has been growing roughly at, in local currency, 6% base. Which is big, obviously, on our base. So when you grow 6%, year before we were $86 billion, so we grew by about $5.50 billion in dollars, so it's significant for us. We have also been able to grow the company in the right segments, the right parts of our business, so profitability has increased rather significantly. And we've taken cost out. We've been on a mission to improve our cost structure as we grow the company.
In which segments have you seen growth?
We were growing pretty significantly before this, but a lot of it in the product lines that don't carry strong profit margins, particularly in the PC business, which is a good business--doesn't make it a bad business--it just has a different economic model than when you grow your software business or your services business. So we've seen good growth in our supplies business, our printing business, good growth in software, good growth in services, put that in with good cost structure and you have good earnings performance.
Your predecessor hasn't been shy about taking credit for this on a recent book tour. Is she off-base?
I don't care who gets any of the credit.
You have told analysts that HP is competing for a total market of $1 trillion, 10 times your current revenues. How much of that could you expect to own, considering that you are already No. 1 or No. 2 in most of your markets? Where's the growth going to come from?
It's different than that. For us, we've had to go compete for all that market. And we have spots where we don't compete for all of that total, available market. So, for us, we have to get the company in a position to go compete for that. We still have a lot of accounts we don't cover. We still have a lot of parts of markets that we don't cover. That's why we're trying to increase the size of our sales force and certainly get partnerships with our channel partners that give us more extensive coverage. Because we think we have upside. Sure, we've got great technology. We're not sure we've covered all the buying points. So we're working on that.
Can you give me an example of that?
Take a look at this country [the United States.] There a re the top 2,000 accounts. There's still about half of them we don't call on. We have channel partners that call on them.... HP is amazing. When we show up to participate, we typically do well with our customers. But it's so important for us that we show up, and not only show up but show value and deliver all of the assets that Hewlett-Packard can help a company with. When we do, good things tend to happen, just as you might expect. That's why we have to get out there and cover that part of the market.
You've said emerging markets are an important part of the growth equation due to the typically faster IT spending. How is HP working to better understand the opportunity?
Emerging markets are extremely attractive to us, and they have several characteristics. One, GDP grows faster than the average GDP. Second, IT typically grows 50%, sometimes even better or even higher, than GDP. In emerging markets, there's [often] very little IT ecosystem. Which means for us tremendous opportunity to go scale. And it means the bigger companies that bring infrastructure typically have more opportunity than you might normally expect. So, it's very important for us. They become very attractive. Now, that said, while they are growing quickly, when you get out to 2009, 2010, emerging markets using normal definitions are only 30%, 35% of the IT market, so the mature markets are still important to us. But we try hard to take a zero-based view to make sure we are appropriately investing resources to those emerging markets, because they are growing. Some actually are not just emerging. They actually emerged in terms of scale and scope and size.
Examples of those?
I can argue, today, China, India, and Brazil. All markets that still have some of the characteristics I've described, but in terms of raw scale, they're quite sizable.
I was quite surprised to see HP so strong recently into the mid-range PC business, especially laptops. They tend to tell you in business school, 'Don't get caught in the middle.' Is this wrong, in terms of the strategy?
Well, I haven't been back to business school for a while. I can tell you, though, that what we're trying to do is, if you look at how the market has evolved for PCs, the market used to have a very, very large 'white box' content, which was not branded content. And typically that was with a relatively sized price delta against a relatively sized average selling price. The average selling price has declined significantly, and even though the deltas are still 10% or 15%, the dollars that that changes into are now very small. White box share is now declining rapidly. Which tells me, when you look at our consumer data, that price is no longer as big a driver of market position. It's about service. It's about reliability. It's about feature sets. Levels of integration. So, for us, we're trying to make sure we have those right. Because I think if we came out and just had, in isolation, only a lower price, it probably wouldn't help us all that much.
The cost of technology for a variety of reasons has been dropping, but in emerging markets, prices need to be lower still. It seems staying in hardware, like printers and PCs, would be a tremendously painful thing to do. Am I missing something here?
Well, they're different markets. I wouldn't necessarily compare the two. They have some overlaps but many differences. In the printing market, it's very much a useability market, so you've got very much the after-market that goes with how long is a printer installed, how much does a printer print, and so forth, and that's an ecosystem around the printer. PCs, yeah, you've got to look at the model. I think definitely we're trying to. Because it's not just about the unit, it's about the 'attach' that goes with the unit. The attach that goes with the unit for us is the amount of other product that comes with the PC, whether that's a docking station, whether it's memory, whether it's a bag, whether it's, even, services. We find more and more people thinking of the PC not just as a device but actually, and I use this word loosely, as a portal to a series of applications and services that you can now access, whether those are search capabilities, whether that's telephonic voice capabilities, you've got a lot of things now. As the world moves toward mobility, you have people running around with these devices that need all types of capability. I've got my financial information on there, for the company. I need extreme security around that information, yet I want a lot of applications and services. I think, for us, we have to be thinking about that device. We're going to ship, roughly, 40 million of those this year. When you think about that device, or those devices, in the context of what I've described, you get a different strategic hypothesis about what that market can be. That's why you see us doing a lot of different bundles in how we take that service and products to market. I think the device is a lot more strategic than some in the past have described.
Let's talk about the 'adaptive enterprise' business, this idea of a virtually cost-free and human-free infrastructure for data centers. How do you sell a theoretical product that has yet to be really developed?
Well, we don't think it's a theoretical product. If you look at the adaptive infrastructure in the marketplace, it starts with the fact that we're doing it ourselves. We have a large IT spend, a large IT organization, a large enterprise to automate, and I think one of the most important things that we felt, back in '05, was that we couldn't go to market--to your point--with an offer that was just a bunch of slideware, that couldn't be backed up by road maps and technologies and, frankly, us ourselves using it and implementing it. So we started out in 2005 with 87-plus data centers. We're moving that to three-plus data centers. Three data centers with redundancies so call it six, but basically three primary data centers. We're taking our server population from 23,000 to 14,000. We're virtualizing blade [servers], at least some percentage of that infrastructure. ... While we do that consolidation, we'll get 80% more processing power. We'll decrease our power and cooling by 55% to 60%, while we do it. At the end of the day, we'll take our 5,000 applications to 1,100. And we'll halve our IT costs in basically three-and-a-half years. We'll do that with integrating our information silos. We have 700 data marts, or operational data stores. We'll be integrating that into one enterprise use of information. And we'll be able to get better information, halve the cost, we'll have reduced the risk of the enterprise of HP, and we'll be doing it with HP technology. When somebody tells me that we're without specifics, I don't know how that could be. We could lay out a road map for you about the IT infrastructure at HP, and show you module by module with what technology and what servers we're using to make that happen. That's exactly what we're bringing to market. ... When you get our IT organization people out there, they're great salespeople for us without intending to be.
Because they just tell people, 'Here's what we're doing.' And this is so important, because this is no small thing for us, to say we've got to be the ones using what we're selling. Because we work it out. It's hard to believe, but sometimes there's actually problems, and we actually know what they are.
You have said in recent interviews that it's important to reduce the ping-pong effect at HP, to make a smaller number of people responsible for larger decisions. Is it that HP was a bloated company before your arrival, or is the market just fundamentally different?
Let me make sure I tell you one thing, and I may be answering an earlier question, when you talk about who gets the credit for the resurgence of HP, it should be the company. The people in the company have worked really hard and have done a great job. I don't think any of this is about one person. Frankly, I think that's rhetoric. It takes a lot of people to get a company right. And it's been a good job on the part of the whole of the people in the company. That said, you're right. There's been a lot of moving pieces. And we have reduced our headcount in some areas, increased our headcount in the other. We've literally had to take more cost out than our cost models would have described because we knew we had to reinvest in other areas and we still need to reinvest. Then again, I think the customer should feel good. At the end of the day, we're increasing our spend in investment, in services, we're increasing our investments in R&D [research and development], we're increasing our investments in our go-to-market, customer-facing position. We're trying to make sure we have got ourselves focused where we think our customers want us to be.
I'm fascinated by the move by Google and others to build gigantic server farms around the country. The computer itself is disappearing. As you pointed out earlier, it's becoming a portal. How does HP fit into the scheme of the elimination of technology, or the virtualization of it?
Oh, it's the elimination of it. I think, again, it's the natural fact that most servers, over the years, have been built out based on applications. Most servers are dedicated to applications. That does create some under-utilization of the technology. Then you have to take into consideration the peaks of the use of that capability. Most people build servers today with the peak in mind, some premium capability above the peak, and that creates an opportunity. So, for us, we need to lead that, and we think leading that is a tremendous opportunity for HP. There are fewer service providers than there were a few years ago, and we think the markets are longing for what we're doing. We're going to try to help drive it and lead it, and we think we do. It's great news for us.
Virtualization of data, pushing it out to distant servers, will drive down the price. But far enough for small and medium-sized businesses and for the developing world?
I don't think we would agree with your hypothesis that if you build out massive server farms, all the customers will come. The data says to us that lots of customers still want to keep their data in-house. So, for us, we'll offer the capability to do one of three things: We'll either bring the tools and the capabilities to the customer. Second, we'll help design the architecture for you and give you the tools. Or, third, we'll actually run everything for you. I think you will find that the medium businesses, businesses that are too small to get the leverage of scale that some of these big companies do, I think they will look to big companies like us, and we hope we're the one chosen in cases that make sense, to actually give those companies the leverage they need so they can get their IT cost as either a percentage of revenue or percent of gross profit or per employee or however they look at it. I think you're right, you've got companies that want to compete with big companies but the fact is they don't have the scale to do it. The IT costs to get in the game have some up-front costs or foundational costs that they just can't amortize across their base. We think there's a tremendous service opportunity for us in that market.
Some technology companies have gone on an acquisition spree of late, as much to get loads of new customers in new sectors as to acquire the actual target. How does HP grow in this climate if not by buying customers?
Well, we've been growing organically, which helps. We've been doing some acquisitions, but acquisitions for us follow some pretty simple filters. They have to make sense to us strategically. They have to make sense to us financially. And we have to be able to operationally run them. So to buy something that makes sense to financially and strategically but we actually can't run it well or integrate it, it wouldn't make sense. So, those are the three filters we go through. We don't buy companies, typically, to just buy them. I'm not trying to say our strategy is different, or better than anybody else's, it's just what our strategy is.
How do you build attachment to the brand if not by just building better and better stuff?
Well, better stuff helps. The customer experience is broad: The customer experience is at the point of transaction. The customer experience is post-transaction. And that whole ecosystem in terms of relationship is important to us. As high quality as it is, in the entire life of a piece of technology, typically something happens. And every time something happens it can be viewed as a problem or as an opportunity to create a differentiated relationship with our customer. Provided we can execute on the second, we get not just a tremendous attach but actually a lifetime relationship with our customer. And that's what so important for us to build on. When people see HP, think of Hewlett-Packard, they think of quality, they think of support, and they think of a company that I'd like to trust my technology to. That's what we're trying to get done, and the attach typically follows. If you look at our customer 'delight' metrics, when customers are delighted, good things happen.
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|Article Type:||Company overview|
|Date:||Jul 1, 2007|
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