Q: Autonomy executives claim they were surprised and a bit distressed that Robison left the company because they had expected him to oversee the integration. Do you think Robison’s departure had an impact on the integration of Autonomy?
A: No. Mike Lynch (founder and then-CEO of Autonomy) reported directly to me. And I actually spent a fair amount of time on Autonomy from the beginning because it was such a big bet for the company. I spent a lot of time with Mike Lynch and a fair amount of time with the people from Autonomy, understanding the products, the technology. I think they felt like they were being managed by the CEO, which I think they appreciated. And which, by the way, was part of the deal Mike had struck with Leo, which is that he would report directly to the CEO. And I did not change that.
Q: And so initially the idea was to keep Autonomy as a separate unit. Did that change?
A: They are now part of HP Software, which is run by George Kadifa, and which includes what I call our IT performance suite, our security suite as well as our information optimization group, which is not only Autonomy but also HP’s information management group, which actually we rolled right to Mike right away. So, the minute the deal closed, the HPIM products and people actually became part of Autonomy. And we called it the AUIM business, the Autonomy information management business. Now that is part of Software.
Q: Mike Lynch was fired in May 2012. What wasn’t working at Autonomy in those first six months after the acquisition closed?
A: I think their Q1 results weren’t great, but they were okay. And, of course, the Q2 results were not up to expectations or up to their plan. And that was really the catalyst for Mike leaving the company.
But I have seen the movie before around companies that are more start-ups in nature without some of the processes and disciplines you would expect for a company that size. And I began to be concerned about the scalability of Mike and his ability to take this company through the 800, 900, billion-dollar sales barrier. Which for many companies, getting over that billion-dollar hurdle.... Listen, it was hard for eBay, it was hard for PayPal, it was hard for Skype. Once you go over roughly $1 billion, plus or minus 20%, you can’t manage it by just walking around anymore. You’ve got to have some processes and disciplines. Which often, to start-up executives, is not an exciting concept. But it’s absolutely necessary when you’re going to run at scale on three different continents with a number of different products.
Q: In March 2012, you made another big decision to merge the printer (known as IPG) and the PC groups. Over the years, these two groups have been merged and separated at times. Why did you want to put them back together?
A: I knew we had a couple of challenges. Challenge No. 1 was we had to create the financial capacity to make investments in the business. Said another way, we had to align our cost structure with our revenue trajectory. Which, by the way, we’ve been very successful in doing. And so I was looking for ... how do we reorganize ourselves to be more efficient, to do better service to customers and create the financial capacity to invest?
As it turns out, the printing and the personal systems group have almost entirely the same set of customers. So virtually all of the partners, our value-added resellers and distributors, are the same for PSG and IPG. And the same person in the enterprise typically buys PCs and printers. And it’s very different than the executives that buy servers, storage, networking and software and services. And there was, I thought, tremendous synergies in terms of supply-chain quality, go to market, that would outweigh any integration issues. And I think that’s turned out to be the case. I think this has actually gone very well. There were things I wanted the groups to learn from one another too. So when you are in the PSG business, you are running a 5% operating margin business. You are watching every dime. Because you make a mistake and you don’t have any money. The IPG side was a much higher-margin business. So I sort of wanted a little of the cost, supply chain, really-watching-every-penny DNA to go over to the printing side. But the printing side had tremendous intellectual property, tremendous R&D capability, tremendous R&D pipeline. And I wanted a little bit more of that to go to the PSG side.
And, actually, that’s turned out to be quite good. And you can start to see we’ve got movement of executives. Ron Coughlin ran the laser business and he now runs the consumer PC business. We’ve taken Tony Prophet, who ran the supply chain for PSG, now runs the supply chain for the whole entity. So we’re getting a lot of what I had hoped would happen in terms of cross-fertilization, cost savings, better go-to-market.
Q: When you announced third-quarter earnings last August, you discussed a lot of the big head winds HP faced, including the Chinese market and the global economy. At the same time, almost every segment of HP’s business either declined that quarter or was under heavy pressure. Were the challenges facing HP becoming even more extreme than you had expected?
A: HP has been under revenue pressure really since the second quarter of 2010 (quarter ending April 2010). If you look at what happened in 2011, almost every quarter was revenue decline. You will recall Leo Apotheker actually reduced guidance, I think, three quarters in a row. So this decline had started, in my view, around Q2 of 2010. So when I took over, we were in the middle of that and that decline in revenues was not entirely across the board. 3Par was growing at 80% at HP Networking. There were bright spots. But generally speaking, revenue was declining. So I understood that we had to take action against this. And what you do in that set of circumstances is you align cost structure with your revenue trajectory. And then you begin to figure out, OK, how am I going to turn revenue trajectory?
What you can see is that we did a good job of aligning the cost structure. And the best evidence for that is that in Q1 our earnings per share declined by 32%. In Q2, it was a 22% decline. In Q3, it was negative 9%. And in Q4, it was negative 1%. Now, negative 1% is not what we aspire to. But you can see, as revenues continue to decline, we have begun to get a cost structure in place that was aligned with the revenue trajectory. And that’s the first thing you do in a turnaround.
Then you think, OK, now while I’m doing that, how do I get the revenues growing again. And that’s first and foremost product. And we’ve done a lot of work. We’ve put money back into R&D. I think we’ve got some of the strongest product that this company has had in many years. And I think most HP observers would tell you that. And whether that’s our new storage products. Just two weeks ago we introduced our mid-tier storage product. Our software-defined networking product. Our new moonshot server. Our line of mobile devices. Our ink in the office printers. Our multi-function printers. We’ve also stabilized our enterprise services business. Now what we have to show the world is that we can grow these businesses. What I told the market at the security analyst meeting is that probably wouldn’t happen until late 2013 or early 2014. This was sort of a fix and rebuild year where I think you’d start to see revenues stabilize. But I think all the work we’re doing will lead, if it turns out the way we hope it will, then it will start to turn in 2014.
Q: Speaking of that analyst meeting, during your remarks HP’s stock fell 8% as you detailed just how extensive were the problems HP faced and how long you thought it would take to turn things around. Investors were clearly shocked, and yet many analysts also gave you kudos for being so blunt. Was it your intention that day to deliver such a blunt assessment of the company?
A: I am a pretty transparent communicator. And I think when your company is not performing the way it should, you’ve got to actually explain to people why that is, what you’re going to do about it, and what the journey is that you are on. And that’s why I laid out the five-year turnaround plan. I characterized Year 1 as a diagnosis and lay-the-foundation year. Year 2 is fix and rebuild. Year 3 is begin to accelerate. And then I was quite specific about the challenges this company faced. I think the other thing I was transparent about was, we’re trying to set this company up for the long haul. Listen, could you have taken out more cost in 2013? Yes. Would it have looked better? Yes. But you would be in the exact same position in 2014, not having made the investments that you need to get HP on a sustainable growth pattern. And whether that’s the investment in IT, the investment in R&D, the investment in the new products and the new go-to-market strategy. We’re building this thing so that we’re not repeating the cycle.
Q: One thing that you didn’t mention at that October analyst day was that there were any accounting issues at Autonomy. There have been some reports that you were aware of possible problems as early as last summer. Why it take until November to disclose the issues? And were there any other options to consider other than making such a big public announcement and contacting securities regulators?
A: I’ll answer the second question first. No. There was no alternative. Because the magnitude of the write-down we took, the seriousness around the accounting improprieties, the disclosure failures were significant enough that there was nothing else to do except to say, "Hey, here’s what we know."
So when Mike [Lynch] left, it was three or four weeks, and a senior executive from his team came forward and said, "Listen, I need to tell you what has been going on at Autonomy for the three years prior to when you bought it." And I’m not sure that we would have been able to figure out the accounting improprieties had we not had a guide on that journey. Because it was pretty sophisticated. So we took that very seriously. Did a forensic review of the accounting. Hired PWC. That was a very detailed and quite long process. Because you’ve got to make sure you understand as much as you can. And you’ve got to make sure all the analysis is ticked and tied and all of it makes sense. And really, that was not completed until mid-October, late October.