HP hopes printers plus PCs equals profits

Wringing profits out of a PC company is a demanding task for any business executive, but Hewlett-Packard  believes the executive who has generated healthy profit margins within its printer division can work the same magic on its PC group in a combined organization announced Friday.

Vyomesh Joshi, executive vice president of the Imaging and Printing Group, will head up a new organization known as the Imaging and Personal Systems Group (IPSG), effective immediately, said Bob Sherbin, an HP spokesman. Duane Zitzner, executive vice president of the former Personal Systems Group, has retired as of Friday, but will help HP and Joshi plan the integration and transition of the two businesses, Sherbin said.

Analysts were initially unsure how much of an impact the reorganization would have on HP’s customers. The two businesses already coordinate their activities on everything from launch strategies to the colors of future products, and the sales organizations are also very closely aligned, said Stephen Baker, director of industry analysis with NPD Techworld in Reston, Virginia.

“I don’t think having them in one group is going to have them working together any more closely than they are already. It just seems like it’s shuffling the deck chairs a little,” Baker said.

HP Chairman and Chief Executive Officer Carly Fiorina has shown a willingness to overhaul the company’s organizational structure if certain groups are not living up to expectations for profitability. In 2003, HP combined the Enterprise Systems Group with the HP Services Group in hopes of ending losses within its server and storage group. The former head of HP Services, Ann Livermore, took over the combined organization currently known as the Technology Solutions Group, and has delivered increased profits in recent quarters.

In November, Fiorina said that the PC and server divisions have not lived up to expectations for profitability, and that HP was looking for ways to improve profits within the groups. Few companies are able to sustain quarter after quarter of healthy profits by selling PCs. Only Dell Inc. has been consistently profitable in recent years selling PCs.

The printer business, however, is the most impressive division within HP from a financial perspective. It has consistently posted the largest profits within the company, and enjoys a strong brand reputation among consumers and business customers.

HP’s printer and PC groups posted identical revenue of $6.5 billion for the company’s fiscal fourth quarter, the period ended Oct. 31. However, the PC business recorded an operating profit of just $78 million, which was the division’s strongest performance in four years, while the printer business made $1.1 billion in operating profits during the quarter. The entire company recorded a $1.3 billion net income for the quarter.

The timing of HP’s announcement is interesting, given that it comes days before IDC and Gartner Inc. release their fourth-quarter market share numbers of the PC market, and a month before HP’s quarterly results are announced, said Roger Kay, vice president of client computing with IDC. HP’s PC business usually posts its best quarter of the year during the holiday shopping season.

“If they had an execution misstep during the quarter, that might explain some of this,” Kay said. A botched rollout of a new order management system led to a shakeup within HP’s sales organization in August, when three top executives were shown the door.

Zitzner, 57, had wanted to retire for a while, but did not want to leave HP until the PC group had posted a solid profit and was heading upward, Sherbin said.

HP does not plan to lay off any workers as part of the reorganization, Sherbin said. “There is significant room to reduce costs, but we don’t plan to get there by cutting jobs,” he said, pointing to cost-cutting moves such as integrating the supply chains of the two divisions and operating more efficiently.

Joshi, known as “VJ,” is highly thought of by HP employees and industry analysts alike. He is credited with building HP’s printer division into the company’s marquee business, and has more personality than the average technology executive, analysts said.

The reorganization should help foster an even greater degree of interoperation between the printer and PC businesspeople, even if the two groups are already familiar with each other, said Sam Bhavnani, an analyst with Current Analysis Inc. in La Jolla, California.

“What VJ has done has been an unquestionable success. When you bring everything under the leadership of one guy, that integration is forced (even closer together),” Bhavnani said.

Fiorina praised Joshi in a statement, saying “there is no person better suited to lead this new organization than Vyomesh Joshi.”

However, it’s difficult to see where any manager could squeeze profits out of the PC business, Kay said. And Joshi’s experience with the printer group, which enjoys a unique position within that market, might not translate to the PC business.

“There’s no obvious reason why VJ is going to help with computers. PCs are a street fight, while printers are where HP is dominant,” Kay said.

Integrating the two divisions could have a negative effect on any plans HP might have to ultimately spin off either the PC or printer divisions separately, but a combined printer/PC division might be a more attractive target for any potential suitors, said Steven Milunovich, a financial analyst with Merrill Lynch & Co. Inc. in New York, in a research note distributed Friday. IBM Corp., the company that invented the PC, sold its PC division in December to Lenovo Group Ltd. in hopes of bolstering its other businesses by ridding itself of a drain on overall profits.

The company has insisted it is committed to the PC business in the wake of the Lenovo purchase, despite some financial analysts such as Milunovich calling for HP to rid itself of the group, similar to IBM’s move. HP believes that PCs are a critical part of both its business and consumer strategies, allowing the company to offer corporations an entire IT package from notebooks to data-center servers and to sell consumers PCs, printers, and digital cameras that work well together.

But when HP announced its intention to acquire Compaq in 2001, detractors predicted that HP would find it difficult to generate profits because of stagnant growth in the PC market. At the time, PC sales were in free fall, and while the market recovered nicely in the intervening years, no PC company is resting easy while preparing for the second half of the decade.

PC growth is expected to slow this year to single digits, and increase only slightly beyond that in 2006. Companies like HP and Dell are developing products in areas traditionally served by consumer electronics companies, such as flat-screen televisions and digital music players, in hopes of diversifying their businesses.

Joshi has an enormous job on his hands in trying to deliver profits that justify the billions of dollars HP spends to operate a PC division in the face of slowing growth and fierce competition, while making sure that HP’s printer cash cow doesn’t miss a step. His divisions now generate over half the revenue HP takes in during a quarter, and investors, analysts, and users will be watching closely to see how the combined organization serves customers.

REFERENCES: HP server group sees profit in Q4, Nov. 16, 2004 Businesses keep Q3 PC growth on track, Oct. 18, 2004 HP could make more of Compaq acquisition, CEO says, Oct. 15, 2004 HP fires Blackmore, other sales executives, Aug. 12, 2004 HP in street fight over PCs with Dell, Apr. 21, 2003