Senior VP, Chief Strategy Officer & Investor Relations, Hewlett Packard Enterprise
Cross Says Dell, HP Shifting to Higher Margin Revenue
May 17 (Bloomberg) -- Shannon Cross, an analyst at Cross Research, talks about Dell Inc. and Hewlett-Packard Co.'s earnings ...
About Shannon Cross
In a September 2012 interview, Shannon Cross, then an analyst at Cross Research, discussed the earnings reports of Dell and Hewlett-Packard. Cross stated that both companies were shifting their revenue mix toward higher-margin areas, such as storage and services, moving away from the low-margin PC business. She noted that Dell was focusing its research and development on storage and other growth areas rather than PCs. Cross also commented on HP's services business, saying that the prior administration had underinvested in EDS, leading to problems that HP was addressing by reinvesting. Regarding HP's CEO Leo Apotheker, Cross said it was early to criticize him for not delivering consistent earnings, noting that he had hit earnings targets but that guidance had not improved, and that he inherited significant underinvestment on the services side. On tablets, Cross observed that Apple was the dominant player with about 70% market share, making it difficult for competitors to challenge its ecosystem. She suggested there was an opportunity for tablets in the corporate world over time, though PCs would remain a major part of the corporate environment.
Transcript (17 segments)
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Host0:00
Let's bring in right now Shannon Cross of Cross Research. She's one of the most accurate forecasters of Dell's stock, making her a Bloomberg best. We appreciate you, Shannon, taking some time here to talk to us about the numbers that just came across the ticker. So what do you think? I mean, were people bracing themselves for kind of an HP story and now pleasantly surprised?
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Shannon Cross0:19
Well, I think people will be happy with the numbers, but I'm not sure people were bracing themselves for an HP story other than HP's corporate side of the business. If you net out the services, but you look at their enterprise business and even what they saw on the PC side for corporations was strong, so it kind of follows through that Dell's would be as well. And clearly Dell is in a good position with their customer base because they do have limited exposure to consumer.
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Host0:43
I'm curious, Shannon, when we talk about the services business that suffered at HP, particularly the margins, why do you think Dell, it looks at least at first glance like Dell did better on that specific front? Why do you think that is?
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Shannon Cross0:55
Well, I think part of the problem is you have EDS, which is effectively HP's services business, having problems. It was basically a company that had been milked for profitability over the prior administration and they hadn't been investing as much. I think what HP decided today was to take the pill, basically to take their medicine and say we can continue on this path and run into a wall at some point, or we can reset expectations, reinvest in the business, really drive vertical solutions, hire more salespeople, and at the end of the day have a more sustainable, profitable business.
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Host1:28
What about the cost cutting though? I mean, understandable that there's a rough road ahead for PC demand right now. Understandable that the tablet business is at least for now dampening demand for PCs among consumers. But if you're so worried that any hiring is frowned upon and forget about discretionary spending like Christmas drinks are out the door, isn't that a concerning sign for a company?
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Shannon Cross1:50
Well, look, I think it depends on what segment you're looking at. Dell doesn't spend that much in terms of R&D in the PC business anymore. They focus their R&D, as they should, on their storage business and on other areas where there are growth opportunities. So I think probably within HP, it's less about purely no more hiring and freeze everything and just throw the baby out with the bathwater. It's more about let's focus on where we're actually going to get growth and benefit. Again, that's one of the reasons why they're investing more on the services side.
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Host2:21
You know, Matt just mentioned costs and I want to bring up that gross margin number again, 23.4% at Dell. Do you think that is a sustainable number considering that we've seen costs for almost everything going up?
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Shannon Cross2:35
Well, I think even Dell would say that likely there's pressure from a component standpoint as you go further into the year. In talking with HP today, they also noted that they expect tightening components. But remember, Dell is also mix shifting to higher margin revenue, as is HP for that matter. With Dell, they're moving more into storage and some of the services and other things that move away from the low margin just pure client PC business and more toward what Dell can do to help drive my data center and my cloud offerings.
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Host3:04
I wonder about the tablets. Julie said they don't have a viable tablet offering for the consumer, but does anybody? Is it even worth getting into this business with the iPad out there? Can you offer a better product for $500 than the iPad?
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Shannon Cross3:18
Well, so far nobody's been able to do that. If you look at what happened with the Zoom and you look at Playbook, HP's TouchPad, I think will be interesting. I'm far more interested in a TouchPad from a corporate standpoint because I think HP with their enterprise business can probably do a little more customization than Apple's going to be willing to do. But clearly, Apple's the juggernaut. Look at iPod, right? We've had all sorts of competition come in and iPod still has about 70% market share. It's going to be incredibly hard for people to fight the ecosystem that Apple's developed.
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Host3:46
Do you see though an enterprise explosion for tablets? I mean, we didn't and maybe couldn't have had that for iPods obviously, but do you see a cloud type of growth here for enterprise tablet usage?
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Shannon Cross3:57
I think there will be substantial tablet usage. I mean, we see a difference between content consumers and content creators. The content creators, which I would be because I write all of these research reports you people all read, need our PC, need our keyboard. But content consumers just need to be able to read. So I think there is an opportunity over time for tablets. I still think PCs will be a big part of the corporate world, but I do think there are areas where tablets could come in.
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Host4:25
And is Dell even going to be on the map in that department?
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Shannon Cross4:28
Well, they do have some offerings, albeit I think they would admit they're not particularly successful at this point. I think everybody's going to have to try to find a way to compete. The challenge is, whereas HP actually has webOS which is the operating system, Dell and a lot of others are going to have to rely upon Android, and Android clearly has some challenges.
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Host4:51
Let me ask you about Leo Apotheker, because Jules mentioned a comment by Brian Marshall saying that Mark Hurd delivered consistent earnings and Leo just hasn't done that yet. Do you think it's fair? He's obviously just come into this position here.
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Shannon Cross5:06
I think it's rather early to be hitting him on that. It's true, clearly. It's interesting though, actually they've hit their earnings, it's just been the guidance that hasn't pulled out, which again doesn't matter because the stock's down and you have to deal with it. But I think it's a bit early to be hitting him for what he walked into. Again, on the services side, I think there was probably pretty significant underinvestment done under the prior administration.
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Host5:30
Shannon, thanks so much for joining us. Really appreciate it. Shannon Cross there from Cross Research.