By ROLFE WINKLER
Mark Hurd couldn't have timed his exit from Hewlett-Packard any better had he planned it.
Hailed as the rescuer of H-P's once-moribund stock, the course charted by Mr. Hurd appears, in the fullness of time, to have led H-P back into the digital doldrums. His successor, Leo Apotheker, is the one forced to find a way out.
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Leo Apotheker
Analyst Robert Cihra of Caris & Co. notes that, under Mr. Hurd, growth in PCs drove H-P's top line, while cost cuts drove its bottom line. But the company's latest quarterly results and outlook released Tuesday is a reminder that PC growth is slowing and there are few costs left to cut.
The PC business, still 32% of revenue, looks vulnerable. For starters, there is H-P's problematic mix of customers. Unlike rival Dell, H-P leans more heavily on consumers, where sales declined 12% in the latest quarter. Business sales still are expanding modestly. Add to that the long-term challenge posed by tablets, which already are gobbling up sales of low-end laptops.
And H-P's impressive 6.4% operating-profit margin in PCs may be peaking as well. Favorable component costs look temporary, while Asian rival Lenovo Group is pushing harder into the U.S. To gain share, Lenovo appears willing to sell PCs near cost.
Meanwhile, disappointing sales in H-P's services segment, 27% of overall revenue, suggests Mr. Hurd's cost cuts are coming home to roost. Such cuts weakened the company's competitive position, say Goldman Sachs analysts, an argument supported by H-P's decision now to reinvest in services to win new business.
There is a bright spot. Sales of servers, storage and networking gear rose a smart 22%. And operating-profit margin of about 15% is better than the company average. At 17% of company revenue, however, it will be tough for this segment's growth to counterbalance weakness in PCs and services.
Investors still are waiting to hear Mr. Apotheker's strategic vision for the company, which he plans to outline at an investor meeting on March 14. With high-margin software still just 2% of revenue, compared with International Business Machine's more than 20%, some think H-P might make a big software acquisition.
But unlike other tech titans, H-P, with $10.5 billion of net debt, doesn't have the balance sheet to easily pull off a big deal. A big deal paid for with debt risks the company's credit rating, potentially problematic for the financing business; paying for it with H-P's relatively cheap stock risks diluting shareholders substantially.
That's just as well. As IBM has demonstrated repeatedly, the secret to successful tech deals is to focus on buying modestly sized businesses, rich in intellectual property, whose products can benefit from being plugged into a global sales force.
Even with the shares trading at about 10 times forward earnings, H-P faces some serious investment ahead to revitalize the business. Investors should bide their time.
Write to Rolfe Winkler at rolfe.winkler@wsj.com
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