Executive team > Carly Fiorina speeches

Speeches

CARLY FIORINA
GOLDMAN SACHS TECHNOLOGY INVESTMENT SYMPOSIUM 2003
LA QUINTA, CALIFORNIA
FEBRUARY 26, 2003
"REMARKS"

Good afternoon.

I was actually at this conference a year ago, and it made me think about what was going on at the time, so I'll start by saying what a difference a year makes!

You may not remember, but the speech that I gave at the Goldman Sachs Conference in February of last year actually became the subject of a lawsuit some months later—a lawsuit that charged we were not going to be able to achieve our two-and-a-half billion in cost synergies by 2004. We won that lawsuit, and of course, we're now at the point where we've achieved three billion in cost synergies in 2003. That was an important speech a year ago, because most of the world at that point was betting against our ability to even get the votes for the merger, and also betting against our ability to execute even if we won the vote.

In looking back over that speech, I talked about three fundamental drivers of our decisions and our strategy. One was that the changes that are going on in the IT industry are structural and permanent, not simply cyclical economics. And the structural and permanent changes that I talked about were around customers' ongoing focus on value, as opposed to simply a faster, hotter box—even if it's priced cheaper. It was around customers' ongoing focus on productivity and manageability, and the ongoing advantage of scope and scale, diversity, and strong market position. That change in customer requirements, and the resulting change in what defines success in the technology industry going forward, again, is structural and permanent. And I think that a year later, we all understand customers' focus and preoccupation with value, with manageability, with productivity—and that preoccupation isn't going to change when the economy comes back.

The second thing I talked about was an opportunity for us as a company to both strengthen our market position, and improve our cost structures simultaneously. And at an even more fundamental level, I also talked about a company seizing control of its own destiny; a company having enough leverage and enough assets to stay in control of its destiny; a company choosing to lead the trends that were transforming an industry—as opposed to a company choosing to follow or be buffeted about by those trends.

And so, in addition to talking a little bit about the quarter we just announced, I really want to talk about the progress we've made against each of those objectives.

The quarter that we just announced demonstrates a couple of things. It demonstrates first of all, that it is too soon to call a turn in IT spending. But, frankly, it also demonstrates the tremendous operating leverage we have in this company—even in an uncertain revenue environment. We can't control the economy; we can't control the impact of an impending war; we can't control how soon technology spending will snap back. But what we can control is how we operate our own business for efficiency and effectiveness and earnings leverage; and we also can control our execution in the marketplace in terms of how well we satisfy our customers, and how well we beat our competitors.

We can measure that, among other ways, by our sequential market share gain. This was our best profitability quarter since we launched the company—PSG achieved profitability a full quarter ahead of schedule; our financial services business achieved profitability, as well. And despite an uncertain, revenue-challenged environment, our Enterprise Systems Group, which is servers, storage and software, made another big move in profitability improvement, this time of about 36 percent.

Now, as all of you know this morning, there's been a lot of discussion about this quarter's report. One thing I want to take head-on is the talk out there that some of these profit improvements came as the result of reclassification—nothing could be further from the truth. These are real profit improvements, and we will build upon these profit gains. PSG for example, is a truly profitable business, and it's going to stay a profitable business. And ESG is on-track to hit profitability in the second quarter of this year.

Those of you who were at our December analysts' meeting may remember me saying, "We are in control of our profitability. We don't need to rely on an improvement in the external environment to achieve our profit objectives." That remains true today, and I think that's demonstrated in the quarter that we've just produced.

The shortfall in revenue that we experienced was largely in the U.S. We saw good sequential growth in Europe; reasonable sequential growth in Asia-Pacific, with the exception of Japan; even in North America—Canada showed good sequential growth. It really is the U.S. and Latin America whose economies and IT spending really have not yet turned. As I think a number of other speakers have said, we don't see the environment getting worse, but we certainly don't see it getting better. I think there were some who predicted a turn in IT spending in January, and I think they made the call too soon.

Again, in an uncertain environment, we're very much focused on improving our market position, and one of those areas we look at is quarter-over-quarter market share gain. This is important because as you know, all of the external market share data that's collected is also done on a year-over-year compare. But for us, year-over-year compares are less relevant—perhaps because a year ago for the fourth calendar quarter 2001, we were two separate companies with two separate product lines. So, trying to compare fourth calendar quarter 2002 to fourth calendar quarter 2001 is probably not as relevant as looking at whether we're making progress quarter-over-quarter.

So, what you see here are our market share gains from third calendar quarter to fourth calendar quarter, and the resulting market position. We feel this is pretty impressive—with a number-one position, sequential market share gains across each of our businesses and all of our product categories. We have, for example, firmly taken the number-one position in UNIX from Sun in the fourth calendar quarter. We are growing faster than our next nearest competitor in terms of sequential market share gains in Windows and Linux, as well as UNIX. And you can see in the personal systems space that we are gaining market share sequentially, as well. We think this is important, and we're going to continue to look at it.

Obviously, Imaging and Printing continues to be a powerhouse for our business. These kinds of market share gains are particularly impressive when you realize that this is a business that has market shares ranging anywhere from 40 percent to 70 percent. Imaging and Printing is also a business that I think demonstrates our ability to deliver into the marketplace the best technology at the best prices with the best total customer experience. We are the low-cost provider here. We have the best technology. We have a great record of innovation and our customer satisfaction is also very high. We don't take any competitor lightly in this space, but we think we are strong and getting stronger.

In our HP Services business, while market share isn't tracked per se in HP Services, we are continuing to grow, particularly our Managed Services business—what the industry would call outsourcing. We are smaller than many of our competitors, yet growing faster than the market. It is a profitable business for us, and importantly, we have been rated the number-one outsourcing vendor in terms of price, value, capability and trust in a survey that was recently done across 700 IT professionals.

We have made great progress in terms of improving our profitability. I think it's important to look at these numbers and recognize that we are improving our gross margins, improving our operating expenses, improving our operating margins substantially on both a non-GAAP and a GAAP basis—all, again, in an uncertain environment.

I would make one other point. One of the reasons we are continuing to focus attention on non-GAAP is because strictly speaking, a GAAP compare is less relevant. And the reason for that is because on a pure GAAP basis, we were a standalone HP a year ago, that today is a combined, merged company. So just keep that in mind as you're looking at GAAP-over-GAAP. Non-GAAP, we think, represents the more relevant compare until we get through our first-year anniversary and GAAP compares are truly apples to apples.

But we think this is a good story; it's about focusing on what we can control. And what we can control is how we execute in the market. We can control our internal effectiveness and operational effort.

I think this picture speaks to a huge amount of progress in less than a year. We just completed our third quarter since merging these two companies. We have met or exceeded every single milestone, and frankly, we simply will continue to meet or exceed every milestone in terms of our integration, in terms of cost structure reduction, in terms of improving profitability.

This is what earnings per share look like—again, a pretty dramatic picture. Obviously, the third fiscal quarter is down in terms of GAAP earnings per share—that's where we took a very large restructuring charge. We took that charge as quickly as we could—again, I think a great example of progress. Now clearly, we still have a lot of work to do, but I think against the backdrop of what people were saying a year ago about what we could and couldn't get done, and to look back at what we've accomplished, I'm obviously very proud of the HP team.

The balance sheet continues to be very strong. We think we have very good cash-generating capability. We think our balance sheet remains an asset and a competitive weapon.

I'm very quickly just giving you a sense of each of the businesses and the progress they've made over the last year. Again, this is the Personal Systems Group. Its profitability is real, and it's driven by supply chain efficiencies—and procurement efficiencies in particular. We're going to build on this progress going forward.

The Enterprise Systems Group. We're on track to achieve profitability in this group in the second half of 2003, and we feel good about the progress we're making here. One of the important things to bear in mind is that this is a group that has already taken about a billion dollars out of its ongoing operating expense. We still have work to do; for example, we still have large groups of employees in France and Germany who remain on the payroll because of legal issues and works councils issues. And a lot of those people are in the Enterprise Systems Group, so there is still a completion of the integration that we need to achieve, but we feel good about our progress here.

HP Services—we talked in our conference call yesterday about the fact that in some cases, we had customer support renewal contracts—particularly in the U.S.—where the renewal cycle has gotten lengthened, principally because of an uncertain economic environment. We have a lot of visibility into those contracts, and we think that it is revenue delayed, rather than revenue that we've lost—we'll see those in the second quarter. But what I want you to focus on is the fact that we are making improvement in this business as well, in terms of our earnings leverage and our operating margin.

And finally, Imaging and Printing. Even as we are introducing new products and gaining market share, we continue to have a very, very strong business—16.2 points of operating margin in this most recent quarter. Our fourth fiscal quarter is one in which gross margins seasonally declined, but just absolutely tremendous business here.

Now let me shift gears for just a moment. I hope that one of the things that you get out of these charts is a sense of the earnings leverage that's in this company. We also are focused on continuing to improve our market position, and differentiating for our customers what is a completely unique portfolio in the industry. HP is a company that is geographically very diverse, and the portfolio that we have is unique. We are diverse in terms of market segment—the largest consumer technology company in the world; the largest-selling medium-business technology company in the world; close to the largest enterprise technology company in the world. And we simply have an opportunity to put these assets together in a way that no one else has.

We have four fundamental objectives in terms of our strategy, and we have been spending a lot of time to ensure that the strategy and our ability to deliver this set of capabilities absolutely resonate with our customers.

The first objective is fairly self-explanatory, but let me spend a moment on it. It basically defines how we are going to be the company that delivers the best return on information technology—and by best return on information technology, what we mean is the lowest total cost of acquisition, the lowest total cost of ownership, the best manageability, the best interoperability—all of which are focused on productivity, value and business agility. And that's what we are delivering, whether it's in our portfolio of products, or what we deliver in our services business. For example, we have a whole consulting practice now around measuring business agility, which among other things, refers to the customer's ability to get more value out of their existing IT infrastructure.

One of the reasons that you see technology spending slowing and why I think in some ways the recovery will be slower than perhaps some of you are expecting, and why we will never return to the growth rates of the late nineties, is because customers first are figuring out how to leverage the investments they've already made—to get massive utilization out of the technology they already have, increase the utilization and the productivity of the technology they already have—before they're prepared to invest in more. That represents a big opportunity for us to gain share, and it is where customers are focusing their attention. They have figured out that throwing technology at a problem doesn't solve it—in fact, it frequently creates more problems.

In terms of our consumer strategy, we're really focused on providing simple and rewarding experiences. It may sound like a lot of gobbledygook, but fundamentally, consumers are increasingly focused not on just a cheaper piece of equipment, but "How do I use technology to accomplish something; to make my life more productive, make it more fun, make it more communicative?"

One reason why we're doing so well in terms of gaining market share both in Imaging and Printing and in our Personal Systems business, is because we are driving innovation as well as world-class cost structures—which lead me to our third important strategic objective: we must have—and already do have in key parts of our business—world-class cost structures. And a world-class cost structure isn't simply about earnings leverage, although it is clearly about that. It's also about enhancing our ability to grow so that we can price competitively and still drop to the bottom line. And all of the work that we're doing is designed to get each of our businesses at world class in terms of their cost structures. Although we've made tremendous progress—we will take $3 billion of cost out in 2003—we think we have an opportunity to do more.

And finally, focused innovation. As a technology company, innovation is our life's blood, and we intend to be the best technology company in the world. So, one of the things that we measure and focus on is if we are innovating fast enough. And I'm very pleased to say that in the second half of 2002—on top of everything else we were doing, such as integrating two companies, rolling out product lines, getting teams together—we achieved the fastest rate of innovation in HP company history. And the fastest rate of innovation is measured by how many patents we produce, as well as how many new products we introduce. We're generating patents today at the rate of about five a day. We introduced more than a hundred products in the last six months of 2002. We are a technology company.

Interestingly, by "focused innovation" we also mean: "Are we focusing our innovative capabilities where customers are willing to pay for them? In other words, innovation for innovation's sake, as long as the innovation is focused on things that customers will actually buy, has to do with the fact that we are leveraging the capabilities of a whole set of partners out in the marketplace. We are the number-one partner today to almost anyone you can name: from Siebel, to SAP, to BEA, to Oracle, to Accenture, to BearingPoint, to CGEY, to Microsoft and to Intel. And that gives us an opportunity to not only focus on innovation, but to leverage the innovative capabilities and the go-to-market capabilities of our partners.

Drilling down just for a moment on what we mean by the best return on IT, and importantly, how do we deliver it; as I've said, it's all about lowering the cost of acquisition and ongoing management, and improving the productivity, utility, and manageability of our customers' IT investment. And we think there are a couple of really important principles that frankly, we exceed in. One is to rely on standards-based systems. Why do customers care about that? Because it makes the acquisition costs lower and it increases their flexibility. Customers want freedom of choice and flexibility to adapt and move.

Secondly, we think modular components are very important, which is why we think it's a big deal that we were the first company to introduce blade servers. It's one of the reasons we think it's a big deal that we have 53 percent market share in the blade market today. It's an example of modularity that allows customers to make incremental changes to their IT infrastructure in a way that suits their timing and their budget.

Our services business is focused on how do we use technology to help reduce complexity and increase agility, and I've framed it that way because, just as an example, if you went in to a data center that HP manages on behalf of a customer, and you compared it to a data center that IBM manages on behalf of their customers, what you will see is that we have far fewer people sitting in the data center. And the reason we have fewer people is because we use technology differently. As I mentioned earlier, we have a whole set of practices that help customers measure how agile their infrastructure really is.

And finally, I've mentioned our partnerships, but we really think the customers benefit from the set of partnerships we have. It increases our customers' flexibility, it increases our customers' opportunity to choose, and in many cases, it increases the productivity of the dollars our customers spend on technology.

Focused innovation. These are the areas where we believe we can make a unique contribution and lead. And our test for spending our own R&D dollars and focusing our people is where we can make a unique contribution and lead. Where we can't, we're going to partner for the rest. In the consumer space, what we're really talking about is improving interoperability and reducing complexity.

We're talking about management and interoperability in utilization software and services. And here, as you know, we're making huge investments in our OpenView platform and really focusing that platform across the management of services and diverse environments—not only diverse technology environments, but diverse service environments. It's one of the reasons that you see us embracing, for example, both .NET and J2EE. We have introduced lots of new products in the last six months in this space, and will continue to make investments here.

Computing utility and grid technologies—everybody's talking about this. It is clear that this is the direction in which technology is heading, and we have something called the Utility Data Center. It is not ViewGraph. It is not slideware. It is a real capability that is working in customers' environments today—and that we actually use in our own environment. We run our own HP Labs development environment on our Utility Data Center offerings. So, think about computing as a utility: a flexible resource that flexes to meet changing business requirements. It's real, it's today, and we're delivering it today. And based on considerable outside evaluation, we are 12 to 18 months ahead of everyone else in this regard.

Everyone is moving to rich media. Every customer we have—whether it's a consumer, or a small business, or a large business—is thinking about "how do I use rich media more effectively?" This is becoming a world where we want to use all the digital content. We have a huge advantage here in terms of imaging technologies, and you can think about the application of those technologies to a consumer space like digital photography. You can also think about the application of those technologies in a medical environment, for example.

And finally, mobility and security, and trusted systems; these are places where we have an opportunity because of the breadth of our portfolio, our presence, and our partnerships that we really can drive these capabilities. And clearly, these matter tremendously to customers. These are the same priorities that we've been focused on for some time.

We will complete the merger integration, and we will achieve $3 billion in cost savings this year. We will meet our profit goals; we've been fairly explicit about what those goals are, both in terms of the company as a whole as well as in terms of each of our businesses. We will meet those goals, and we do not require an upturn in the economy to do so. We are in control of our destiny in that sense.

And, finally, we will seek a continuous focus on what we can control. What we can control is maximizing the operating leverage that's in this business; there's a lot, and we are creating more every day. We can control our ability to deliver the absolute best products and services; we're going to stay on that. You'll see us continuing to deliver new products into the marketplace, and we think our sequential market share gains—while we have a long way to go—indicate that our customers accept them. We're going to stay focused on going on the offense and continuing to gain market share and make appropriate investments for growth. We are continuing to invest heavily in R & D, and we will stay on that course.

So we feel very good about where we are—very good about how much we have accomplished in the past year and particularly, in the last three quarters since we've pulled these companies together. We know we have work left to do, but based upon what we've accomplished thus far, we're pretty confident in our ability to accomplish that work.

Thank you.