Pondering HP’s $1-Billion Services Remake

I typically use this blog to convey my modest knowledge and understanding of industry developments and events, but toward the end of this post, I will ask my readers to provide me with some enlightenment. I hope you will be kind enough to assist in this ambitious endeavor.

First, let’s step back and consider HP’s major announcement yesterday. As Craig Matsumoto of Light Reading wrote, HP dominated, perhaps monopolized, the cloud-computing news yesterday with is plans to cut 9,000 employees and spend $1 billion over the next few years to extensively automate its customer-facing EDS data centers.

Yes, I know, HP says it will hire 6,000 employees back, but the upshot is that HP is radically revamping what’s left of EDS for a cloud-computing future in which customer relationships will involve intensive automation and a lot fewer humans than were necessary in the old “high touch” era of consulting’s halcyon days.

We’re in a different set of economic circumstances today, though, and no company embraces that lean, mean ethos like HP. It’s pushing standardized, commoditized hardware and relentless data-center automation with a near-medieval vengeance, employees and competitors be damned. If the shareholders are smiling, with their thumbs jutting upward, all is well in Mark Hurd’s austere universe.

All of which brings us to why this announcement was made. While Hurd is lauded by investors as the consummate operational scourge, buttressed by a zealous executive team that searches for efficiency gains and cost reductions like value shoppers looking for deals at Wal-Mart, he and his consiglieri were seen to be struggling to get full value from their $13.6-billion acquisition of EDS.  That’s not a favorable perception, and it’s not one Hurd or the HP board wants to see gain popular currency. Radical surgery was required, as it usually is (even perhaps when it isn’t) somewhere within HP.

Over at SearchDataCenter.comBarbara Darrow provides a cogent analysis of what’s behind HP’s data-center shakeup. She points out that HP, in its earnings call two weeks ago, reported that revenue from its services division grew a paltry two percent year over year, with much of that gain more than offset by currency fluctuations. Meanwhile, HP’s lower-margin PC sales spiked more than 20 percent during the same period.  The contrast between the performance of the two groups was stark and unwelcome.

So, more change comes to HP. The shuffling of bodies out of and back into the company will continue at a relatively frenetic pace until Hurd and his team crack the code or steer the company off the rails. If the history of the technology industry teaches us anything, it’s that past performance does not guarantee future results, so be careful about placing wagers on the ultimate outcome.

Speaking of results, this is where I need the benefit of your wisdom. During a call yesterday to announce its momentous overhaul to EDS, HP took a question from an analyst regarding the company decision to incur a GAAP charge rather than a non-GAAP charge (or charges) to account for the restructuring costs. Here’s the exchange, as excerpted from a Thomson Reuters transcript:

Toni Sacconaghi – Sanford C. Bernstein – Analyst

And then, Cathie, just on the charge. You know, this is a multi-year transformation, something clearly looking to improve your business. It looks like you will be excluding the restructuring charge from your non-GAAP earnings. Could you just review how you determine whether something is a charge or a one-time charge that you choose to exclude from non-GAAP earnings and what is a normal course of transformation in terms of charge and what you would include in as a charge and non-GAAP earnings?

Cathie Lesjak – Hewlett-Packard Company – EVP, CFO

Sure. We look at a number of different factors when we’re determining whether or not the charge should be a GAAP-only restructuring charge. We look at things like whether or not it’s one-time in nature as opposed to a recurring –. It’s generally a global in scope kind of initiative involving a number of different countries.

It also has to involve something structural, long-term strategic realignment of a business segment or across a business segment. While business charges in non-GAAP are typically more routine, routine rebalancing of activities and adjustments to changing business conditions. So this is really a structural change.

We are transforming the Enterprise Services business with the investment that we are making and we are making these one-time investments to modernize our delivery organization and expand our global footprint and fundamentally simplify our operating model and it is really those pieces that have us take this out as a GAAP only charge. We don’t really want it to basically taint the ongoing earnings with something that is nonrecurring in nature.

Ann Livermore – Hewlett-Packard Company – EVP, Enterprise Business

Tony, this is Ann. One example of that would be a when Cathie mentioned simplifying the operating model, one action we’re doing is to take some layers out of the structure. If you look at — we always count layers in between our clients and our CEO as one of the things that we think is important from an operating model perspective. So part of this action, for example, and why we think the charge is appropriate this way is because we’re taking some layers out of the structure.

Huh? Alas, I am a simple man, but that distinction seems arbitrary to me, open to misinterpretation, if not abuse. Please enlighten me, dear readers, as to why HP applied the relevant charges in this manner. This curious mind wants to know.

2 responses to “Pondering HP’s $1-Billion Services Remake

  1. I’d love to help with your question but can’t. One thing that does come out of the answers however (this may or may not throw light on the GAAP vs non-GAAP issue) is HP is keen to take this as a one-off hit rather than “tainting” the balance sheet for years to come.

    Suggests to me that Mark Hurd and his SLT are confident enough about the current financial year. In other words, the stock price blip that results from this one-off write-down will be less painful than it would have been had it bled out over a long period of time.

  2. That’s a valid point. HP would rather incur the charge all at once than spread it across a longer period.

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