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"Is Carly Toast Yet?" - Maureen O'Gara on HP's Fiorina, Three Years On

"Is Carly Toast Yet?" - Maureen O'Gara on HP's Fiorina, Three Years On

Related Links:
  • HP Falls, Dell Shines
  • "HP's Problem Ain't the SAP Install," Says Sun's Schwartz

    So here we are three weeks shy of the third anniversary of that fateful day when HP said it was going to buy Compaq, and Cleo, the muse of history, who gets spiteful when people ignore her, is sitting there saying, "I told you so."

    HP's enterprise storage and server unit, ostensibly the real reason HP bought Compaq, is a dud - the company's chronically worst performer - and whatever the temptation to blame weak spending - it's more an HP-specific problem than anything else.

    EMC, IBM and Dell are eating its lunch.

    Because of the unit's "unacceptable execution" - the opinion of HP CEO Carly Fiorina - whose idea it was to buy Compaq - the company, which is a week away from posting its third-quarter results, blindsided the market early Thursday morning and warned that its earnings had come up short.

    It will come in with 24 cents when 31 cents was expected.

    Blaming "management missteps," Carly promised that heads would roll, but refused to say immediately whose heads would be mounted on pikes and paraded around town.

    The bloodletting is supposed to make the unit profitable in Q4.

    Carly claimed the crisis was over and that the issues that created it were behind her even though she said HP's fourth quarter will also come in four to nine cents short of expectations.

    That kind of prediction means that outfits like Goldman Sachs won't rush in to shore up the stock. They'll wait and see how far down it drifts. HP closed down 14.4% to $16.71 Thursday after sinking lower most of the day. Even at $16.71, it's a 52-week low and, as a result, the whole tech market took another beating.

    Now, a sensible person might wonder at this point if it isn't Carly's pretty little neck that should go to the block considering HP's stock price is down 62% since she arrived at the company.

    Jim Cramer of CNBC's Kudlow and Cramer, speaking for the analyst community, said "the long knives" are out and that sentiment is growing that she'll be gone soon.

    Writing in RealMoney.com, Cramer said of the conference call - which he described as "a call from Carly hell" - "The questions, the attitude, the anger, tell me that Carly Fiorina might not be long for Hewlett-Packard. Analysts don't use that tone, don't make those pointed inquiries, unless they know there can be no retribution."

    "I was astonished on the conference call," he said, "by the lack of faith or trust in Fiorina. If it were a cartoon strip and there were bubbles over people's heads showing what they were thinking, you would have read thoughts like this: 'You lying sack of dung, how dare you act as if this stuff was already behind you! Your execution stinks and you have led us down a primrose path. Now we are all going up in smoke because of your dishonesty.'"

    And he likes Carly.


    Carly Fiorina during her Comdex 2002 keynote as she announced
    HP's new ad campaign. (Photo copyright SYS-CON)

    Sanford Bernstein analyst Toni Sacconaghi and Bear Stearns analyst Andy Neff have previously expressed doubts about the merger. Prudential said yesterday that Carly's got credibility and consistency problems.

    HP's numbers are preliminary, but it looks like revenues from servers and storage, which are now part of the Technology Solutions Group together with software and services, came in at $3.4 billion, 5% shy of last year's Q3 number.

    HP veteran Ann Livermore has run TSG for the last eight months.

    At the end of last year, after Carly ran out of things she could cut without the promised magic of the merger kicking in, she reorg'd and moved services, which Ann was running, in with servers, storage and software and gave Ann, who had been considered a CEO candidate before Carly arrived on the scene, the whole enchilada.

    Apparently Ann's job is safe. A few hours after the call, HP leaked to the press the names of three executives who were going to be offered up as living sacrifices:

    • Peter Blackmore, Ann's predecessor, who ran the pre-TSG Enterprise Systems Group before the reorg put him in charge of TSG sales;
    • Jim Milton, a senior VP who ran the unit's Americas sales;
    • and Kasper Rorstead, the guy who ran its sales in EMEA.

    Blackmore is being replaced by Mike Winkler, who's been acting as HP's chief marketing officer and gets to keep that job while he salvages TSG. Winkler ran servers and storage at Compaq for a while before the merger.

    Milton will be replaced by Jack Novia, another TSG senior VP, and Rorsted will be replaced by Bernard Meric, who's been running HP's prized printing business in EMEA.

    When HP set up TSG in December, it said that it had few other places where it could improve revenues. Boy, was it fooled.

    Some of the Q3 particulars are pretty gruesome.

    Q3 Alpha server sales were down 32% year-over-year, and NonStop servers down 25%. Both came to HP from Compaq.

    Intel server revenues were up only 2%. Most of those boxes are Compaq's.

    Unix servers, something that's all HP's own, were surprisingly up 8%.

    HP breaks out Alpha, NonStop and Unix together as Business Critical Servers and said revenues collectively dropped 8% year-over-year to $828 million.

    The numbers are worse than they look by Wall Street's lights. According to Merrill Lynch's model, for instance, industry standard servers declined 12% sequentially.

    Storage, another Compaq contribution, is a particular sore spot. It came in "significantly below plan" and the average selling price of its goods had eroded.

    It came up with $709 million, down 15% year-over-year.

    Online storage, including EVA and XP enterprise storage, declined 23% year-over-year and nearline storage, which includes the tape library business, declined 16% year-over-year.

    Servers and storage together lost $208 million in the quarter, up from a loss of $20 million year-over-year. TSG did $7 billion, up 4%, but its operating profits totaled only $56 million, down $209 million year-over-year.

    Besides poor execution and the shortfall in storage, Carly blamed her problems on hiccups with a new SAP order-processing and supply chain system that HP installed in the US, channel compensation issues and aggressive discounting in Europe and a move to a centralized claims process.

    She also complained that "Normal business acceleration toward quarter end was muted." Dell is laughing all the way to the bank.

    SAP, Europe and storage cost HP $400 million in revenues and $275 million in operating profits.

    The migration to the SAP system reportedly affected Intel servers mostly and business critical servers and storage to a lesser extent. HP said it missed some sales and was forced to ensure some deliveries by working with the channel and airlifting products. "The migration was more disruptive than we'd anticipated," Carly said.

    The company expects shipments to be back to normal by the end of August. Carly acted as if the future was bright.

    She said she entered Q4 with $120 million more in ESS backlog and TGS is going to accelerate its margin improvement plans. New products are supposed to strengthen HP's storage business.

    Otherwise HP was satisfied with its performance in PCs, printing, of course, and software and services.

    Why HP should be happy with software is puzzle considering it lost $45 million on operations. Maybe it's because revenues were up 17% year-over-year to $223 million.

    Otherwise, PCs were up 19% to $5.9 billion, printing up 8% to $5.6 billion and services up 12% to $3.5 billion.

    HP expects to report revenues of $18.9 billion for Q3, roughly in line with estimates.

    Here is HP's internal bloodletting memo:

    To: All HP Employees
    From: Carly Fiorina
    Re: Management Changes


    Dear Colleagues,

    I am announcing the following management changes effective
    immediately.

    Mike Winkler will replace Peter Blackmore as executive vice
    president of the Customer Solutions Group (CSG) with
    responsibility for all direct sales to the company's
    enterprise, small and medium-size business and public
    sector customers worldwide. Mike will also retain his
    current responsibilities.

    Jack Novia will replace Jim Milton as CSG senior vice
    president and managing director for the Americas region.
    Previously, Jack was senior vice president and general
    manager of the HP Technology Solutions Group and spent two
    years as senior vice president and general manager of HP
    Services America.

    Bernard Meric will replace Kasper Rorsted as CSG senior
    vice president and managing director for the Europe, Middle
    East and Africa (EMEA) region. Bernard has served as senior
    vice president of HP's Imaging and Printing Group in EMEA
    for the last several years.

    We thank Peter, Jim and Kasper for their years of service
    and dedication.

    I look forward to working with our new CSG leaders.

    --Carly

     

    Related Links:
  • HP Falls, Dell Shines
  • "HP's Problem Ain't the SAP Install," Says Sun's Schwartz
  • More Stories By Maureen O'Gara

    Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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    Most Recent Comments
    Richard Wilkins 12/05/04 08:31:50 PM EST

    Just a quick look into HP sales ideas. If you are interested in buying a HP consumer product you can call an 800 number and request additional info. I did. India answered. They had no idea what a 'PDA' was. Nuff said. Great pre-sales plan.

    Jennifer Tigessun 09/04/04 03:19:11 AM EDT

    The problems HP is having in the Storage and Server unit are hardly a surprise to anyone inside HP. That division has been bumbling along ever since the merger with a bunch of compaq-heritage sales people who only know how to sell Intel servers, not anything that requires real technical knowledge and customer intimacy (Unix, Non-stop, Alpha, and storage.) Those managers, like Rick Belluzo before them, thought the Age of Commodity was upon us, and the sales force should swing left and sell just that stuff. For god's sake -- they compensate reps on REVENUE, not even margin. Why would anyone kill themselves selling a 9 month sales cycle product, when they can push IA32 servers into the channel? Specialists with Unix knowledge were fired in the U.S. last Auguest. So here we are, a fabulous set of assets bungled by a bunch of incompetents who were allowed to hold on to their jobs way longer than they should have. The sad thing is not that these guys got fired, but that Fiorina didn't confront the issue a year ago.

    Regarding the so-called execution problems, HP has become a company without real end-to-end business focus in servers. Both printers and pc's are run by HP guys who are used to operational centralization. In Servers, functions like Finance, Sales, and IT make decisions indepedently of the business GMs, like coming up on SAP systems that manufacturing may not be able to deal with. Or consolidating claims processing without adequate automation and reporting capabilities. This is a deliberate direction the higher ups have pushed for two years now to get control away from business managers by driving the functions harder. These is cowyboy-mentality of "just do it" that comes directly from Fiorina's style of impatience and lack of operational experience. That's why she wanted Compaq. She wanted a set of managers whose style she preferred, rather than the me, unexciting systems-view, quality-oriented style of HPers. So now we have discounts out of control in Europe, ordering and manufacturing systems that can't keep up with demand in the U.S. and a bunch of functions like IT, Finance and Sales, who think they are the business strategy. Now Fiorina is turning the screws up on the server/storage WW product head (who was told to stick with R&D for the past two years) and Sales, IT, Finance are screaming about "collaboration". None of these guys report to him. Yikes. Get it straight and get a CEO in charge who knows how to to get operational results.

    Shane Kent 08/27/04 03:19:02 PM EDT

    I guess the people at HP really screwed the Compaq stock holders over. Poor X-CPQ stock holders, you would have been far far far better off without the merge. Makes me wonder if Walter Hewlett objecting to the merger was just a ploy to get Compaq's stock holders off guard (lead to believe HP had everything to loose when in reality it was Compaq that had everything to loose). Walter seems to have benefit the most in the long run as he got out while the getting was still good. Like he didn't realize his Co. was headed to the dumpster (an outdated feature-less unix and not so hot new CPU). I think government should look at how much Wlater Hewlett knew of the company's future as that is insider trading on a much larger scale than Martha. I had read that Alpha outperforms Itanium at same clock/cache/ram configuration (I would be interested to know if that is true, if so HP is downgrading Alpha customers).

    puppypie 08/18/04 04:22:47 PM EDT

    First thing, Carly helped sink Lucent. Second, she ran off the son of one of HP''s founders. Third, she trashed the famous HP Way. Fourth, she offended almost 50% of the HP shareholders with the Compaq deal. Fifth, I attended the HP shareholder meeting in Houston this spring, she kept her audience waiting for 20 minutes, then appeared with ta da music as though she were royalty. She had sprinkled shills in the audience to sing her praises. We voted to expense stock options, but she sneered. Sixth, when finally she is run out of Palo Alto, she takes a huge golden parachute with her as smoke rises from the remains of a once great company.

    Raymond 08/18/04 11:43:18 AM EDT

    Carly should definately be FIRED. I was one of her biggest proponents when she got the job and said she was going to return to the days of "Bill & Dave''s Excellent Company". Well then I had a problem with a piece of HP equipment. I even went to the point of the "Email Carly" thing. What I got was a low level Booger Eating Moron that did not have the power or desire to help me. So I did what any good IT Manager would do. I sold my HP stock and have not bought anything from them since!!!!!

    Gary McGlinn 08/17/04 01:30:04 PM EDT

    The whole episode is sad. It reflects poorly on the people that hired her: bean counters and "investors". Seems that they are poor judges of horseflesh. HP - Compaq = Oil - Water . HP should have been seeking high margin, growth businesses, or creating them (as it has done in the past). Even if it means being a smaller company. Things like Compaq should be spun off, not added on. Since we are in a historical vein, I''ll cite Aristotle, "Know thyself." Now, all we can do is watch the slow, painful, decline of HP. Even if they "make it" there will be nothing unique about them. Innovation and inspiration come from the top down. Its hard to beat Dell at being Dell. HP came to a fork in the road and took the road most well travelled, and that will make all the difference.

    Anonymous Coward 08/17/04 09:03:15 AM EDT

    Tech media downgrades you from Mr. Chuang to "Alfred" and Mrs. Fiorina to "Carly" first, before you are out. That might be the answer you are looking for.

    George 08/17/04 08:46:00 AM EDT

    Relax Monica, the author is not a sexist pig. People also refer to Ebay CEO as simply "Meg" Call him Kevin if it makes you happier... :-))

    Monica 08/17/04 08:35:05 AM EDT

    Her competence aside, why is Fiorina constantly referred to as "Carly" in this article? I noticed that Ann Livermore is referenced as "Ann", but the men in this article and others (Rollins of Dell, for example) are always referred to by their last names.

    A VC in NY 08/17/04 07:53:24 AM EDT

    People knock Carly but at the Brainstorm conf in July she said that we are not anywhere near the end of the run in IT. She feels that the "dot.com bust" marked the "end of the beginning" not the "beginning of the end." She said she feels that we are entering a golden age of information technology that will change business, society, and the lives of everyday people in fundamental ways.

    It was an uplifting speech.

    David Winchell 08/17/04 03:56:17 AM EDT

    The world is boycotting HP for outsourced American Jobs. Carly is a Benedict Arnold CEO soon to be an EX-CEO. Then
    I will buy HP again.

    David Winchell 08/17/04 03:54:34 AM EDT

    The world is boycotting HP for outsourced American Jobs. Carly is a Benedict Arnold CEO soon to be an EX-CEO. Then
    I will buy HP again.

    honest 08/17/04 03:08:32 AM EDT

    You can really see the vultures flying in on this one. Carly stinks, HP stinks, get rid of PCs, servers and storage etc... Good think none of you are running a big corp. Hey guys, it ain't that easy, you konw. What does this have to do with JDJ? Well ... throwing mud at IBM competitors seems to be the only interest at SYS-CON these days.

    HP is still a great company, and they also have great products, as are IBM and Sun. My hat to everyone there trying to do their best in very difficult times. This kind of reporting has almost destroyed Sun ... it seems that HP is next to follow.

    SYS-CON is not getting a penny from IBM, they say ... they just enjoy bashing anyone that competes with IBM. I still don't understand why.

    Tom Welsh 08/17/04 02:00:19 AM EDT

    Nice classical reference, Maureen, but I think you'll find the Muse of History was actually Clio - not "Carry On Cleo".

    Dennis 08/16/04 11:41:05 PM EDT

    Results do not surprise me. HP should never have acquired Compaq just as Compaq should never have acquired Digital Equipment.

    BOB-DOG 08/16/04 08:40:33 PM EDT

    What a pathetic jerk Carly is: she fails, so she fires three top execs. What a weasal. It sickens to me to think what her golden parachute's going to do for her.

    FinanceGuy3 08/15/04 11:01:45 AM EDT

    HP and Sun compared by Dan Wilchins of Reuters:

    HP's difficulty in the server market could suggest that more trouble is in store for Sun Microsystems Inc., traders said. Servers are Sun Micro's bread and butter, and the credit might be a better candidate for shorting because HP has a strong balance sheet, generates lots of cash flow and trades at tight credit spreads.

    "How much are you really going to make on HP? The reward you could get doesn't justify the risk," a trader said.

    Protecting HP debt against default for five years in the credit derivatives market costs 33 basis points, or $33,000 per year for every $10 million insured. That's 5 basis points more than Wednesday, but spreads are not likely to widen much more from here, a trader said.

    Meanwhile, protecting Sun Micro debt against default cost 157 basis points on Thursday, up from 147 basis points on Wednesday. And that level could rise further, traders said.

    Sun Micro had $7.61 billion of cash and marketable securities as of June 30 versus roughly $1.3 billion of senior unsecured debt, so the company has no near-term credit concerns. The company's revenue in the quarter ended June 30 rose for the first time in more than three years.

    fedupwithu2 08/15/04 07:37:33 AM EDT

    Carly was lucky enough to achieve Teflon status at AT&T & Lucent, although her real credentials were very thin.

    Unfortunately, her accession to CEO/CHAIR/QUEEN/EMPRESS/GODDESS @ HP took her so far past her "Peter Principle" level of incompetence, that it's a pure B-School thesis cautionary tale of pure ambition without the balance of extraordinary skill. She has achieved unlimited power @ HP, but it hasn't given her the skill to manage the power and manage HP at the same time. She is simply unable to deal with people who run multi-$$billion businesses, and realize that they are skilled professionals and business leaders themselves. To Her, they are just subordinates, to be told what to do, and to be treated like the serfs she thinks they are.

    Truly sad to see her wield her axe without consideration or thought.

    A great deal of Lucent's problems can be atrributed to Carly, although she did not bear the ultimate responsibility. She was able, by virtue of her personality and drive, to have a LOT of influence on the CEO @ Lucent, but she didn't bear the responsibility.

    She's just a lot of smoke and mirrors, masquerading as a competent manager

    Last quarter has exposed her for the fraud she is.

    ilbanker 08/14/04 10:14:40 AM EDT

    She'll go. You don't undress 3 execs like she did Thursday and not pay for it. The board hired her to pad their pockets, but in the last 48 hours, what they've seen erased will sit them up in their coffins...

    jkgend 08/14/04 08:49:44 AM EDT

    Here are some of the things HP could do to improve shareholder value ...

    - Fire Carly, of course.

    - Shut down the PC divisions, overnight. They can NEVER (repeat NEVER) be competitve nor provide a decent return on investment. They should have been shut down years ago. Notice that IBM PC divisions are mere shells of their former selves and IBM sells PCs at a profit and does NOT care about market share. Shutting down the PC divisions will make no difference to sales at the other divisions because most PCs are purchased by the financial buyers at the companies NOT the IT department.

    - Sell the server divisions to Sun. Sun would essentially be buying share to compete against IBM and Dell, which are squeezing both Sun and HP like tubes of tooth paste. At best, only one other comapnay will be able to survive the assult from IBM and Dell.

    - Sell the consulting business to another consulting company (EDS? IBM? Joes Consulting and Surf Board Shop?)

    - Invest in printing and start making inexpensive cartridges for everyones printers. There are enough companies in the world that know how to make cartridges for HP printers and one of them is going to start doing it eventually. BTW - most of the key patents have expired.

    Basically, most of HP's business units are in deep, deep trouble and HP should cut its losses rather than keeping them on expensive oxygen.