Hewlitt Pakardd
05-06-2005, 08:27
:confused:
This bit of drivel came from the CEO of HP... I know at first it seems like a tranquilizer, but if you read through it, you'll see why HP is floundering, and laugh yourself stupid. It's really quite entertaining.
Question: After reading this, do you think:
A) HP is doomed
B)Capitalism in general is doomed?
C) The CEO of HP is a very bad chat 'bot that failed a Turing test?
D) All CEO's and upper management are totally overpaid morons?
------------------------------------------------------------------
CEO Transcript
Mark hosts Q2 earnings Q&A with employees
May 18, 2005
MARK HURD: Now, ask me anything — as long as it has to do with HP. And in a rough way around Q2/Q3 and go forward; not about something in ’99.
Okay. Any questions?
AUDIENCE: Yes, you’ve mentioned that there’s no room for error — that Q3 is going to be tough. What can employees do as individuals to make a difference for the company?
MARK: I think a lot of things. I think when we talk about what folks can do clearly we’re interested in saving money. Clearly, we’ve got spending as I mentioned earlier in the discussion that it’s not aligned to R&D and not aligned to sales and to the degree that we can be prudent. We’ve got a lot of discretionary spending in the company. We’ve talked before about the money we spend on very discretionary areas. I know there are e-mails floating around the company on some of my opinions around discretionary spending. And I think that certainly can help us.
We’re going to be in a very tight frame of mind. I think if you’re in procurement, you can certainly help us in the areas by which you help us deal with our suppliers. If you’re in the sales organization to the degree that we can get more business that will help. To the degree that you’re in a functional organization and you can support people that are delivering service or trying to sell something because it’s a team sport. To the degree that we can help everybody that’s facing the customer make their job easier, get their job done, make it simpler so that we can all perform better and get more time in front of the customer, I think the better off we’ll be.
I do think, as tight as it is, we gave achievable numbers if we do what we’re supposed to do. So I think the best advice would be is that do what we’re supposed to do, stay focused in every way we can help with anything that’s externally focused and anything that’s internally focused that you don’t think as valuable for the company, discard it. Thanks.
AUDIENCE: Hi Mark. When will businesses and other organizations know what their cost cutting goals are going to be for the rest of this fiscal year and also for ’06?
MARK: Half two ASPIRE is approved at the HP company level, so that should be working through the organization right now. So that is done.
At the same time, I think that we’re going to be trying to set a model out for the next rolling 10 quarters. So I think that again structurally when you start going down, you used the word cost cutting, and I would actually say that you really want to look at trying to get your business models lined up by function and be able to intersect over a period of three years what service level at what cost I want to deliver.
If I was talking about Human Resources, I need to line up the service level that I want to bring to the company at the cost I want to deliver to the company, and I have to intersect that equation over multiple periods of time.
That’s a very different approach than say if you spend $10 ( US ) now, I want you go spend $9. Because at the end of the day, this gets complicated because if you’re going to start changing your cost structure, you have to make choices.
So let’s take Human Resources, sticking on that example. One of our big costs is workforce development. How do we want to spend those workforce development dollars? How do they align relative to market? How do they align relative to our objectives? How do they align relative to our priorities? And then how do they align relative to a long-term cost structure?
You’ve got to do that work in every functional organization. And then we have to align it out over a long period of time, because that gives you time to adapt and adopt your model.
I get anxious when I hear the words cost cutting, because it sounds like, “Hey, in Q3 we’re a penny short. Let’s go run around here and try to find some costs to cut so that we can just make Q3.”
That’s an answer that’s a non-sustainable process over the long run, because in the end if you don’t change the work and you don’t change the way you align the work to the enterprise, you eventually break something somewhere.
So if we wanted to paint this for Q4 of ’07 or Q3 of ’07, you’re taking every one of these and intersecting over time and you’re doing that for every function across the company. That is more important work to us than the second half ASPIRE. And then, frankly, what you do is you try to then intersect how quickly can I hit some of these targets for service levels and cost. And hopefully I can do them faster than 10 or 12 quarters out.
So that’s the work that I’m frankly very focused on across every function and every business — getting that ’07 model locked and loaded. And then working our way backwards to where we really sit in second half of ’05.
And we’re getting a lot of work done. We’re getting a lot of work done. I think what’s important is the analysts were to some degree anxious for, “Hey, when will you have all that work done?” And my answer is, “When we have it done.” Because we don’t want to rush. :confused:
The easiest thing in the world is to run out to a bunch of characters like that and give them numbers and not be able to back them up with sustainable activity. So we need to be prudent about it, understand what service levels we want at what cost levels that we’re willing to take them. Intersect that across the enterprise and get out, get on, we’re getting the work done.
So that’s what I’m very focused on right now. Thank you.
AUDIENCE: Hi Mark. The good news is that as you said, the revenue is up. And unit volume increases in IPG (Imaging and Printing Group) suggest that there’s value to customers. Two questions. What are you hearing from customers in terms of the value that we’re bringing to them. And two, how would you characterize the strength of the portfolio?
MARK: A good question. I’ve spent a lot of face-to-face time with customers and I’ve had a lot of phone time with customers as well. So a fair amount of dialog. And I’d say the attitude of customers toward us is quite positive.
I think the view is that we’re a good company to do business with. I do think we have a ton of support from customers who want to see us succeed for a whole host of reasons. One being we’re one of the last people on the planet spending any consequential R&D, which makes us an absolutely important piece of any enterprise’s business. And frankly, I think very relevant to the consumer as well.
I think the fact that we offer alternatives in many cases to other folks at the same time as we drive innovation, we’re a global player. You can go down a number of various factors. And I think people like doing business with us.
When I make the call to a CIO or to a CEO, they have every opportunity to tell me all the bad things too. And I hear some of those, but I wouldn’t give you an overriding — I tell you how I hear it. And what I hear is many more positives than I do complaints about any issue.
So I think that back to your point, we are growing. We’re growing in absolute dollars. We’ve got growth at the HP company level, we have growth by segment. I think the only issue we’ve got is we’ve got to turn that growth into some money that sticks to our fingers. Because people are working hard.
As I go around the company, I don’t sense that people are, we’ve got a work ethic problem or people are slacking off, and I think our customers feel that. I think we just have to be a little bit more clever from a management perspective, starting with me, that when we go work this hard and deliver this kind of performance, that something sticks to our fingers and we get more rewards for it.
But I feel good about the customer reaction that I’ve received. I really do.
AUDIENCE: So I’ll ask another question, which I know is going to be on the minds of a lot of employees. You mentioned briefly about WFR (Workforce Reduction) and some of the costs associated with that going forward, or the continuation of things that were already planned. Could you put a little bit more context around that, because sometimes it’s a one liner that goes by and people make up all kinds of stories and messages about it. So let’s get it set on the record straight.
MARK: Some of the stuff that’s going on is going on by business that was already in the works. I think when you get into WFR work, the $100 million that we’ve put out is a continuation of things already in place.
I do think in the long run this is a bigger dialog for us as to what should our infrastructure look like and what are the implications of that? And that’s the more important work to get through. So I don’t think this Q3 think, and I don’t mean to minimize it, because there is no such thing as anything easy when you get into this kind of dialog. And I’ve always found that discussions of reduction in force, intellectually people understand, but emotionally, it just doesn’t work.
I use the example, which also motivates people a lot, is that if we all sit down, we all know we’re going to die. :eek: Intellectually, got it. It doesn’t change the fact that at the end, it’s a very emotional, difficult process. And so there’s many of those things in life, and there’s no way to get through it. You’ve got to go get the work done.
So I think in the end, the cost structures in my mind and growth are interrelated. If you can’t get your costs right, when you show up to the customer to bid… Let’s take a service contract, you have to load all of your cost into that bid to go compete.
If you’re going to compete with somebody that’s got a lower cost threshold than you have, you will more than likely lose. So cost and growth, when you want to start driving more 7 percent or higher growth quarters, and start to drive double-digit growth across the enterprise, there is a direct interrelationship between our cost points, eventually our price points, and eventually the aggregate growth we bring to the company.
So I do think in the end, this third quarter thing that’s out there is not the discussion. I think it is us getting on with ensuring we’ve got an appropriate cost structure so we can drive the growth that we need to drive across the enterprise.
I would also say one last piece about it that whatever that cost structure is, there will never be a day that the company as a whole isn’t always trying to improve its cost position. And it isn’t always trying to grow revenue.
And I think in the end, we’re looking to drive, Bob doesn’t like my description of when you have cost and growth, but management’s job is to be able to drive growth while it lowers cost.
And I would find that average companies or good companies are very good at cost, or they’re very good at growth. Great companies nail them both. They nail them both. GE is a great example. Every meeting with GE guys is they start with they’re bankrupt. They zero-base budget everything from the ground up. And they’re always riveted on optimizing their growth.
And that’s what great companies do. And we grew 7 percent, off a big number. Off a big number, and delivered $21.6 billion worth of revenue. Delivered $2.4 worth of cash flow. I don’t think that qualifies us as a crummy company.
Does it qualify us as a great company? I think when you start doing both lines, you’re a great company. So I think that’s the work we have to do.
Sorry for the long answer, but I think you’ve got to go get them both right and once you do, you’ve got great opportunities ahead of you.
AUDIENCE: You mentioned earlier about getting the capital structure right and that was dividends, stock buy backs and acquisitions.
Do you have any thinking at this point on priorities among those three?
MARK: It’s a great question and I have lots of opinions on them. It’s probably best to make sure the CFO and I are aligned before I go deliver those opinions. But clearly I think the way you would build most capital strategies is you would have a view, back to the earlier question — because this stuff actually all fits together — that once you knew what you felt was an appropriate operational performance for the company, like if you argued that this was not.
Hypothetically, if you argue that Q2 was not, and you believe that our stock was then by definition under valued, you would then try to say, “What would be an appropriate performance level?” And then you would find your stock as an attractive acquisition target at a certain point, relative to where you thought you could drive operating performance. And that would give it a prioritization.
Clearly, you have ideas by segment, what markets as our strategic plan would evolve, would be likely for acquisition? You’d want to have enough capital to go make some acquisitions. You’d then want to intersect that with that destination for your stock relative to what you thought you could do.
And then in the end, if you’re out of ideas, out of acquisition ideas, and out of stock buy back ideas, and you’re over capitalized, meaning you have more cash than the operation needs, you would then give the money to the shareholders. So eventually they’re the owners and they’d be the place that you would send cash.
So I think it starts with the baseline, what’s the baseline to run operations? What’s your strategy around acquisitions? What’s the position of operating performance relative to your current price of your stock? And you intersect those answers and you get a capital strategy.
And I have tons of opinions on that, but probably best to get intersected with the CFO before we go do it. The great thing we have is we have a lot of options. So I think we closed the quarter at $14.5 billion worth of cash. As a company we have roughly no debt. The debt in the company is almost all associated with the leasing business. So when you go look at the assets and liabilities of the leasing business, we’re roughly speaking debt free.
So that gives us a lot of flexibility. If we could just get a little more money sticking to our fingers as it runs through the P&L, we’d really be in a pretty cool position.
AUDIENCE: Mark, you mentioned C&I and managed services. As we move more and more into services-led markets in IT, any thoughts on how to tackle them from that area?
MARK: Well, you can’t have businesses that in the end either aren’t making a profit or don’t have a model and a structure that will eventually make a profit. You can lose a lot of money in the name of strategic initiatives, and that puts pressure on other parts of the business eventually.
So I think both are good markets and there certainly are companies in both sectors that are making money and making a lot of money. So I think you could look at the growth. I think at the end of the day when you drive 27 percent growth the way we did in managed services, it does beckon well for the future in terms of the opportunity to start creating a business that we can make money in.
I’m anxious for that day to be sooner as opposed to later, but I think when you have that kind of growth rate, you can make money. So, I think at the end of the day, it’s back to the same thing. There’re multiple dimensions to how you make money in this company.
We do send a lot of cost into both of those businesses, that you would call allocated. And we need to make sure we’re only allocating and creating a cost structure in the company that really suits the needs of those businesses so they can go compete. And at the same time, we need to make sure those businesses are optimized to go compete.
So I think they’re both good markets, they’ve both got good growth associated with them. There’s just no darn reason why we shouldn’t have some money stick to our fingers when we’re done, provided we’re doing our job in the business in terms of our structure that we allocate to it.
So I guess that would be my feeling about it. Thanks.
AUDIENCE: Mark, in terms of operating model, business model perspective, you talked about revenue and operating expenses and money sticking to our fingers. What about the gross margin line? Historically we’ve seen that trending down. Any thoughts on cost of goods sold, product makes and pricing?
MARK: You got them. You’re on all the right points. We’ve got a couple of issues that we are driving growth. The growth that we are driving tends to come in some of our higher volume products that don’t give us the gross margin drop that some others do while we have businesses that can drive higher margins that are still in an embryonic state of profitability.
So your software business for example is a great opportunity for us to improve the margins of the company. We just have to get it delivering the kind of profitability that we know it can. And I think the great example you saw in Q2 was the scale and the profitability drop that you got from the scale of revenue that they described. So we have a mix issue.
Secondly, we clearly have an opportunity in pricing to improve our pricing. And we’ll try to get more mature in the scattered [RAMs]. There’s lots of advanced tools that we’ll work on to ensure we understand pricing discipline. And I think you’ve seen some of it work across some of our businesses, so it shouldn’t be lost on us what’s happened in the PC business where we’ve clearly seen an improvement in the pricing discipline, and that’s helped us.
And it shows up on the bottom line and you can see what happens. Same thing holds true around “COGS” opportunities, the fact for us to do a better job leveraging our “cost of goods sold” spend with some suppliers. And we do have a lot of spend with a couple of companies that we fragment into multiple places instead of getting the leverage that we think we could.
And again, that doesn’t mean we have to centralize the organization, but we have to collaborate across the business to be able to get that leverage.
But those are the three points. If we want to get HP gross margin up, we have to get a mix with growth coming from our higher margin businesses. It doesn’t mean we want less growth in other businesses, we just need more growth out of our higher margin businesses.
We need to be able to get pricing discipline and we need to be able to do it with better leverage on our cost to goods sold.
So, hopefully that plays out as it should. And I agree with you, if we can get that right, it takes tons of pressure off the cost structure of the company. And I think at the end, our shareholders will cheer if they can see any incline in gross margin, you will get them standing in their chairs clapping.
OK, why don’t we stop the questions there. I appreciate you all coming and doing it. I think in the end, this quarter was a difficult quarter for us. Now we’re in the middle of a CEO transition as well, but good news on the revenue line is that we didn’t take our eye off the ball. We did deliver 7 percent growth.
We saw broad growth across regions. We saw broad growth across businesses. To your question earlier about what customers are saying, that’s the best report card you can get, is that customers are buying stuff from us. And that’s encouraging.
The frustrating part is that with the 7 percent growth, we didn’t get enough sticking to our fingers, and that’s just something we’ve got to change.
So I wouldn’t say it was all lost. The worst thing I could have is we had no growth. We had strong cash flow, we had strong growth, just at the end of the day, not enough of this profit stuck to our fingers.
So that’s what I’ve got for today’s session. I really appreciate you all coming and doing this Q&A. Thank you for doing this. I really appreciate it.
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Notice the total lack of discussion of the departure of the previous CEO Carly Fiorina, and her $79 MILLION going away gift?
This bit of drivel came from the CEO of HP... I know at first it seems like a tranquilizer, but if you read through it, you'll see why HP is floundering, and laugh yourself stupid. It's really quite entertaining.
Question: After reading this, do you think:
A) HP is doomed
B)Capitalism in general is doomed?
C) The CEO of HP is a very bad chat 'bot that failed a Turing test?
D) All CEO's and upper management are totally overpaid morons?
------------------------------------------------------------------
CEO Transcript
Mark hosts Q2 earnings Q&A with employees
May 18, 2005
MARK HURD: Now, ask me anything — as long as it has to do with HP. And in a rough way around Q2/Q3 and go forward; not about something in ’99.
Okay. Any questions?
AUDIENCE: Yes, you’ve mentioned that there’s no room for error — that Q3 is going to be tough. What can employees do as individuals to make a difference for the company?
MARK: I think a lot of things. I think when we talk about what folks can do clearly we’re interested in saving money. Clearly, we’ve got spending as I mentioned earlier in the discussion that it’s not aligned to R&D and not aligned to sales and to the degree that we can be prudent. We’ve got a lot of discretionary spending in the company. We’ve talked before about the money we spend on very discretionary areas. I know there are e-mails floating around the company on some of my opinions around discretionary spending. And I think that certainly can help us.
We’re going to be in a very tight frame of mind. I think if you’re in procurement, you can certainly help us in the areas by which you help us deal with our suppliers. If you’re in the sales organization to the degree that we can get more business that will help. To the degree that you’re in a functional organization and you can support people that are delivering service or trying to sell something because it’s a team sport. To the degree that we can help everybody that’s facing the customer make their job easier, get their job done, make it simpler so that we can all perform better and get more time in front of the customer, I think the better off we’ll be.
I do think, as tight as it is, we gave achievable numbers if we do what we’re supposed to do. So I think the best advice would be is that do what we’re supposed to do, stay focused in every way we can help with anything that’s externally focused and anything that’s internally focused that you don’t think as valuable for the company, discard it. Thanks.
AUDIENCE: Hi Mark. When will businesses and other organizations know what their cost cutting goals are going to be for the rest of this fiscal year and also for ’06?
MARK: Half two ASPIRE is approved at the HP company level, so that should be working through the organization right now. So that is done.
At the same time, I think that we’re going to be trying to set a model out for the next rolling 10 quarters. So I think that again structurally when you start going down, you used the word cost cutting, and I would actually say that you really want to look at trying to get your business models lined up by function and be able to intersect over a period of three years what service level at what cost I want to deliver.
If I was talking about Human Resources, I need to line up the service level that I want to bring to the company at the cost I want to deliver to the company, and I have to intersect that equation over multiple periods of time.
That’s a very different approach than say if you spend $10 ( US ) now, I want you go spend $9. Because at the end of the day, this gets complicated because if you’re going to start changing your cost structure, you have to make choices.
So let’s take Human Resources, sticking on that example. One of our big costs is workforce development. How do we want to spend those workforce development dollars? How do they align relative to market? How do they align relative to our objectives? How do they align relative to our priorities? And then how do they align relative to a long-term cost structure?
You’ve got to do that work in every functional organization. And then we have to align it out over a long period of time, because that gives you time to adapt and adopt your model.
I get anxious when I hear the words cost cutting, because it sounds like, “Hey, in Q3 we’re a penny short. Let’s go run around here and try to find some costs to cut so that we can just make Q3.”
That’s an answer that’s a non-sustainable process over the long run, because in the end if you don’t change the work and you don’t change the way you align the work to the enterprise, you eventually break something somewhere.
So if we wanted to paint this for Q4 of ’07 or Q3 of ’07, you’re taking every one of these and intersecting over time and you’re doing that for every function across the company. That is more important work to us than the second half ASPIRE. And then, frankly, what you do is you try to then intersect how quickly can I hit some of these targets for service levels and cost. And hopefully I can do them faster than 10 or 12 quarters out.
So that’s the work that I’m frankly very focused on across every function and every business — getting that ’07 model locked and loaded. And then working our way backwards to where we really sit in second half of ’05.
And we’re getting a lot of work done. We’re getting a lot of work done. I think what’s important is the analysts were to some degree anxious for, “Hey, when will you have all that work done?” And my answer is, “When we have it done.” Because we don’t want to rush. :confused:
The easiest thing in the world is to run out to a bunch of characters like that and give them numbers and not be able to back them up with sustainable activity. So we need to be prudent about it, understand what service levels we want at what cost levels that we’re willing to take them. Intersect that across the enterprise and get out, get on, we’re getting the work done.
So that’s what I’m very focused on right now. Thank you.
AUDIENCE: Hi Mark. The good news is that as you said, the revenue is up. And unit volume increases in IPG (Imaging and Printing Group) suggest that there’s value to customers. Two questions. What are you hearing from customers in terms of the value that we’re bringing to them. And two, how would you characterize the strength of the portfolio?
MARK: A good question. I’ve spent a lot of face-to-face time with customers and I’ve had a lot of phone time with customers as well. So a fair amount of dialog. And I’d say the attitude of customers toward us is quite positive.
I think the view is that we’re a good company to do business with. I do think we have a ton of support from customers who want to see us succeed for a whole host of reasons. One being we’re one of the last people on the planet spending any consequential R&D, which makes us an absolutely important piece of any enterprise’s business. And frankly, I think very relevant to the consumer as well.
I think the fact that we offer alternatives in many cases to other folks at the same time as we drive innovation, we’re a global player. You can go down a number of various factors. And I think people like doing business with us.
When I make the call to a CIO or to a CEO, they have every opportunity to tell me all the bad things too. And I hear some of those, but I wouldn’t give you an overriding — I tell you how I hear it. And what I hear is many more positives than I do complaints about any issue.
So I think that back to your point, we are growing. We’re growing in absolute dollars. We’ve got growth at the HP company level, we have growth by segment. I think the only issue we’ve got is we’ve got to turn that growth into some money that sticks to our fingers. Because people are working hard.
As I go around the company, I don’t sense that people are, we’ve got a work ethic problem or people are slacking off, and I think our customers feel that. I think we just have to be a little bit more clever from a management perspective, starting with me, that when we go work this hard and deliver this kind of performance, that something sticks to our fingers and we get more rewards for it.
But I feel good about the customer reaction that I’ve received. I really do.
AUDIENCE: So I’ll ask another question, which I know is going to be on the minds of a lot of employees. You mentioned briefly about WFR (Workforce Reduction) and some of the costs associated with that going forward, or the continuation of things that were already planned. Could you put a little bit more context around that, because sometimes it’s a one liner that goes by and people make up all kinds of stories and messages about it. So let’s get it set on the record straight.
MARK: Some of the stuff that’s going on is going on by business that was already in the works. I think when you get into WFR work, the $100 million that we’ve put out is a continuation of things already in place.
I do think in the long run this is a bigger dialog for us as to what should our infrastructure look like and what are the implications of that? And that’s the more important work to get through. So I don’t think this Q3 think, and I don’t mean to minimize it, because there is no such thing as anything easy when you get into this kind of dialog. And I’ve always found that discussions of reduction in force, intellectually people understand, but emotionally, it just doesn’t work.
I use the example, which also motivates people a lot, is that if we all sit down, we all know we’re going to die. :eek: Intellectually, got it. It doesn’t change the fact that at the end, it’s a very emotional, difficult process. And so there’s many of those things in life, and there’s no way to get through it. You’ve got to go get the work done.
So I think in the end, the cost structures in my mind and growth are interrelated. If you can’t get your costs right, when you show up to the customer to bid… Let’s take a service contract, you have to load all of your cost into that bid to go compete.
If you’re going to compete with somebody that’s got a lower cost threshold than you have, you will more than likely lose. So cost and growth, when you want to start driving more 7 percent or higher growth quarters, and start to drive double-digit growth across the enterprise, there is a direct interrelationship between our cost points, eventually our price points, and eventually the aggregate growth we bring to the company.
So I do think in the end, this third quarter thing that’s out there is not the discussion. I think it is us getting on with ensuring we’ve got an appropriate cost structure so we can drive the growth that we need to drive across the enterprise.
I would also say one last piece about it that whatever that cost structure is, there will never be a day that the company as a whole isn’t always trying to improve its cost position. And it isn’t always trying to grow revenue.
And I think in the end, we’re looking to drive, Bob doesn’t like my description of when you have cost and growth, but management’s job is to be able to drive growth while it lowers cost.
And I would find that average companies or good companies are very good at cost, or they’re very good at growth. Great companies nail them both. They nail them both. GE is a great example. Every meeting with GE guys is they start with they’re bankrupt. They zero-base budget everything from the ground up. And they’re always riveted on optimizing their growth.
And that’s what great companies do. And we grew 7 percent, off a big number. Off a big number, and delivered $21.6 billion worth of revenue. Delivered $2.4 worth of cash flow. I don’t think that qualifies us as a crummy company.
Does it qualify us as a great company? I think when you start doing both lines, you’re a great company. So I think that’s the work we have to do.
Sorry for the long answer, but I think you’ve got to go get them both right and once you do, you’ve got great opportunities ahead of you.
AUDIENCE: You mentioned earlier about getting the capital structure right and that was dividends, stock buy backs and acquisitions.
Do you have any thinking at this point on priorities among those three?
MARK: It’s a great question and I have lots of opinions on them. It’s probably best to make sure the CFO and I are aligned before I go deliver those opinions. But clearly I think the way you would build most capital strategies is you would have a view, back to the earlier question — because this stuff actually all fits together — that once you knew what you felt was an appropriate operational performance for the company, like if you argued that this was not.
Hypothetically, if you argue that Q2 was not, and you believe that our stock was then by definition under valued, you would then try to say, “What would be an appropriate performance level?” And then you would find your stock as an attractive acquisition target at a certain point, relative to where you thought you could drive operating performance. And that would give it a prioritization.
Clearly, you have ideas by segment, what markets as our strategic plan would evolve, would be likely for acquisition? You’d want to have enough capital to go make some acquisitions. You’d then want to intersect that with that destination for your stock relative to what you thought you could do.
And then in the end, if you’re out of ideas, out of acquisition ideas, and out of stock buy back ideas, and you’re over capitalized, meaning you have more cash than the operation needs, you would then give the money to the shareholders. So eventually they’re the owners and they’d be the place that you would send cash.
So I think it starts with the baseline, what’s the baseline to run operations? What’s your strategy around acquisitions? What’s the position of operating performance relative to your current price of your stock? And you intersect those answers and you get a capital strategy.
And I have tons of opinions on that, but probably best to get intersected with the CFO before we go do it. The great thing we have is we have a lot of options. So I think we closed the quarter at $14.5 billion worth of cash. As a company we have roughly no debt. The debt in the company is almost all associated with the leasing business. So when you go look at the assets and liabilities of the leasing business, we’re roughly speaking debt free.
So that gives us a lot of flexibility. If we could just get a little more money sticking to our fingers as it runs through the P&L, we’d really be in a pretty cool position.
AUDIENCE: Mark, you mentioned C&I and managed services. As we move more and more into services-led markets in IT, any thoughts on how to tackle them from that area?
MARK: Well, you can’t have businesses that in the end either aren’t making a profit or don’t have a model and a structure that will eventually make a profit. You can lose a lot of money in the name of strategic initiatives, and that puts pressure on other parts of the business eventually.
So I think both are good markets and there certainly are companies in both sectors that are making money and making a lot of money. So I think you could look at the growth. I think at the end of the day when you drive 27 percent growth the way we did in managed services, it does beckon well for the future in terms of the opportunity to start creating a business that we can make money in.
I’m anxious for that day to be sooner as opposed to later, but I think when you have that kind of growth rate, you can make money. So, I think at the end of the day, it’s back to the same thing. There’re multiple dimensions to how you make money in this company.
We do send a lot of cost into both of those businesses, that you would call allocated. And we need to make sure we’re only allocating and creating a cost structure in the company that really suits the needs of those businesses so they can go compete. And at the same time, we need to make sure those businesses are optimized to go compete.
So I think they’re both good markets, they’ve both got good growth associated with them. There’s just no darn reason why we shouldn’t have some money stick to our fingers when we’re done, provided we’re doing our job in the business in terms of our structure that we allocate to it.
So I guess that would be my feeling about it. Thanks.
AUDIENCE: Mark, in terms of operating model, business model perspective, you talked about revenue and operating expenses and money sticking to our fingers. What about the gross margin line? Historically we’ve seen that trending down. Any thoughts on cost of goods sold, product makes and pricing?
MARK: You got them. You’re on all the right points. We’ve got a couple of issues that we are driving growth. The growth that we are driving tends to come in some of our higher volume products that don’t give us the gross margin drop that some others do while we have businesses that can drive higher margins that are still in an embryonic state of profitability.
So your software business for example is a great opportunity for us to improve the margins of the company. We just have to get it delivering the kind of profitability that we know it can. And I think the great example you saw in Q2 was the scale and the profitability drop that you got from the scale of revenue that they described. So we have a mix issue.
Secondly, we clearly have an opportunity in pricing to improve our pricing. And we’ll try to get more mature in the scattered [RAMs]. There’s lots of advanced tools that we’ll work on to ensure we understand pricing discipline. And I think you’ve seen some of it work across some of our businesses, so it shouldn’t be lost on us what’s happened in the PC business where we’ve clearly seen an improvement in the pricing discipline, and that’s helped us.
And it shows up on the bottom line and you can see what happens. Same thing holds true around “COGS” opportunities, the fact for us to do a better job leveraging our “cost of goods sold” spend with some suppliers. And we do have a lot of spend with a couple of companies that we fragment into multiple places instead of getting the leverage that we think we could.
And again, that doesn’t mean we have to centralize the organization, but we have to collaborate across the business to be able to get that leverage.
But those are the three points. If we want to get HP gross margin up, we have to get a mix with growth coming from our higher margin businesses. It doesn’t mean we want less growth in other businesses, we just need more growth out of our higher margin businesses.
We need to be able to get pricing discipline and we need to be able to do it with better leverage on our cost to goods sold.
So, hopefully that plays out as it should. And I agree with you, if we can get that right, it takes tons of pressure off the cost structure of the company. And I think at the end, our shareholders will cheer if they can see any incline in gross margin, you will get them standing in their chairs clapping.
OK, why don’t we stop the questions there. I appreciate you all coming and doing it. I think in the end, this quarter was a difficult quarter for us. Now we’re in the middle of a CEO transition as well, but good news on the revenue line is that we didn’t take our eye off the ball. We did deliver 7 percent growth.
We saw broad growth across regions. We saw broad growth across businesses. To your question earlier about what customers are saying, that’s the best report card you can get, is that customers are buying stuff from us. And that’s encouraging.
The frustrating part is that with the 7 percent growth, we didn’t get enough sticking to our fingers, and that’s just something we’ve got to change.
So I wouldn’t say it was all lost. The worst thing I could have is we had no growth. We had strong cash flow, we had strong growth, just at the end of the day, not enough of this profit stuck to our fingers.
So that’s what I’ve got for today’s session. I really appreciate you all coming and doing this Q&A. Thank you for doing this. I really appreciate it.
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Notice the total lack of discussion of the departure of the previous CEO Carly Fiorina, and her $79 MILLION going away gift?