HP’s many paths to profit
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| HP printer sales are dropping, but high-profit ink sales remain strong. Image: HP |
Where’s the most expensive popcorn in the universe? At the movie theater, of course. Theaters know you’ll pay because you’re a captive audience. That explains how Hewlett-Packard (HPQ) made so much money from ink sales last quarter, even though printer sales are slipping: by raising ink prices.
HP printer owners, after all, are themselves a captive audience; they’ll probably pay a little more for ink rather than ceasing to print altogether, or shelling out cash for a whole new printer. Partly because of their willingness to play along, HP offset printer sales that dropped 8% last quarter by boosting its extra-profitable ink sales by 9% over a year ago. (Not all of the increase came from higher ink prices, of course – but it sure helped.)
The ink maneuver is really about more than ink. It also helps us understand how HP CEO Mark Hurd managed to produce pretty good numbers on Monday for the quarter that ended Oct. 31, and why he is comfortable promising Wall Street more of the same in a chaotic economy. HP announced profits of $2.7 billion on sales of $33.6 billion, a 19% increase over last year thanks to the purchase of EDS; next year the company projects sales of $127.5 billion to $130 billion, a big jump over 2008 because of the EDS revenue. Because HP has so many employees and such a broad portfolio of products and services, Hurd has a lot of levers he can pull to hit its profit targets, even in times like these.
Besides the ink price lever, there are others: Cut travel. Postpone hiring. Mandate time off. And there are riskier moves that are also effective, like postponing PC price cuts. (HP plans to do all of these in the coming weeks, with caution.)
In a sense, this is the sort of environment where Hurd, a detail-oriented efficiency nut, seems most in his element. In the nearly four years since he took the reins at HP, he has worked the company over like a drill sergeant, trying to get operations as predictable as possible.
One can’t predict the future, of course, but one can prepare for scenarios. Hurd expects his executives to tell him how they’ll manage to hit their numbers if memory prices jump so high, or if corporate technology spending slows a given amount, or if printer sales take a dive. Perhaps the printer division will tighten its belt more than usual this quarter to deliver profit, and next quarter will be the PC division’s turn. The trick is to know the business so well that you can avoid squeezing any division too hard for too long.
“We are more confident in the bottom line than we are in the top line,” Hurd said when answering an analyst’s question about the future. In other words, we can’t control how much customers buy, but we can control how much we spend.
Time will tell whether Hurd’s plan will work as well in practice as it does on paper; somehow recessions tend to befuddle even the most brilliant business minds. But one must admire the profit-making flexibility that HP’s diverse business affords it. In this way it’s different from Dell (DELL), which mostly sells business hardware; or Cisco (CSCO), which sells enterprise Internet equipment. Even Apple (AAPL) and IBM (IBM), despite their broad variety of products and services, don’t match HP; Apple focuses on consumers and IBM on businesses, while HP manages both.
But HP investors should be warned: no business is completely recession proof, and the best-laid plans go astray. Movie popcorn may be profitable, but if prices get too high – or if times get too tough – eventually, customers just stay home. (MSFT)
Bank of America and Mr. Higgins missing $millions, It can happen to you, my fellow Americans
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As businesses cut back even further, sales of printers will slide even more. At some point even the sale of ink will slow, as mentioned by Mr. Fortt, epically as families budget more and more.
Amazingly, HP could rack up even more profits if they would stop wasting money.
I have a friend who works for HP, and because of travel restrictions instilled to reduce “costs” for that quarter, preventing my friend from travelling actually cost HP $20,000 by not allowing my friend to make this important meeting.
I first learned about HP in 1974 – 34 years ago. They were manufacturing overseas then. But they were not making consumer PCs and printers then either, their market was test equipment and business computers.
Fast forward to the PC era after 1990 – floppy drives, optical drives, hard drives – nearly all made overseas.
Fast forward again : Compaq was manufacturing PCs in 1997 with parts entirely sourced from overseas.
Today all high-volume laptops are manufactured overseas, and most inexpensive PCs destined for the home market are also. All makers. Printers are all manufactured overseas, not just HP.
HP’s business model in the consumer market is thus hugely dependent on the overseas manufacturing – with little to no domestic capacity.
Eventually HP in the US will be no more than a Sales, Software, Service, and Repair company, and the companies it sells to are a replacement market, not an original market.
The question is, will they also be capable of growth in foreign markets, for the real growth is in the expectations of the people in Asian countries.
Throwing away US jobs is not new, IBM has been doing it for years and is turning it up a notch once again.
“Hurd is a less than honorable captain of HP, willing to sink his crew to save himself and his ship.”
Sooo… you’d rather that he let the ship sink? That would be much better, right?
The larger problem isn’t HP, or any other individual company. If HP doesn’t follow the competetion in reducing labor costs and improving efficiency it will end up just like the big 3 auto makers. Hey then maybe they can get the government to bail them out too.
While it would be great to see some big companies like HP standing up for US workers, the long term solutions to problems like offshoring have to be much larger than any single company.
Unpaid time off? Well, that comes as news to this employee. We have already been told we have to take an extra week at Christmas. That means your typical new employee is forced to take 60% of his annual vacation allotment during the holidays.
So, what are you going to cut next, Mark? No doubt it will be yet something else that you and your cronies in California will get to keep due to state law, but the rest of us will lose. Why don’t you close down that albatross in Palo Alto and move to one of these ‘core’ locations you keep forcing your employees to move to?
One big problem with this article – it doesn’t tell the whole truth. HP has sent a HUGE chunk (maybe close to 75%) of it’s work force overseas eliminating US jobs. He’s thrown his own crew overboard. USA HP sites in America are like ghost towns with maybe a fourth of the workers left, and there are threats for more workers to go. He’s given away American jobs to those overseas and people are hurting as a result. Engineers and technicians are out of work and can’t find work elsewhere in these tough economic times. The only ones profitting are Hurd and his board of directors, and a few investors who can pick up some of the stock when it’s on an upswing. When will people begin to talk about all the American jobs lost to other countries overseas? Why aren’t people talking about how this is affecting our country, the economy and American’s lives? Hurd is a less than honorable captain of HP, willing to sink his crew to save himself and his ship.
I wonder if they’ll ever make a, “One Big Button Phone” like rimm? I’ve heard Circus Clowns all over the world are clamoring for one.
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A senior writer for Fortune, Jon Fortt focuses on technology and innovation in Silicon Valley - a subject he's been reporting on since his days as a rookie reporter for the Lexington (Ky.) Herald-Leader. Before joining Fortune in 2007, Jon had reporting and editing stints at Business 2.0 magazine, and the San Jose (Calif.) Mercury News, Silicon Valley's hometown newspaper.
acquiring EDS by HP will be success or problem in term of stocks will be matter of time in quater or 2 in 2009 but as per bruno’s advice from AskaMarketTechnician i was able to up 14% in IT trading in last quater of Dec .