HP’s Strategic Announcements Signal Major Enterprise Focus

Randy Dazo, Jon Reardon, Zac Butcher, Jeff Hayes and Anne Valaitis
Aug 19, 2011

In life they say “timing is everything” and for the financial community, it is no coincidence that HP made several announcements yesterday during their Q3 earnings call.

Leo Apotheker, HP CEO and President, made it clear that he intends to continue aggressively pursuing the enterprise services and software business. Mr. Apotheker announced three bold moves including:

  • “HP confirms that it is in the discussions with Autonomy regarding the possible offer for the company”
  • “HP board of directors has authorized the exploration of strategic alternatives for its Personal Systems Group (PSG)”
  • “HP will discontinue operations of webOS devices”

Any of these announcements made separately could have caused their shareholders to react differently, but as a whole provided a much stronger message of Apotheker’s strategy to transform HP. This was the first BIG announcement from Mr. Apotheker and it was important for him to set expectations for the company, its customers and its shareholders.

Services Group Management Changes

Apotheker also said he was replacing long-time HP Enterprise Services executive Ann Livermore with John Visentin, EVP Enterprise Services.  Mr. Visentin seemingly has a very strong background in the services business having worked at IBM.  The announcements yesterday are reminiscent of IBM when Lou Gerstner announced its move to sell off its PC business and move more forcefully into the services business.  HP has been restructuring its Services group since its acquisition of EDS several years ago. The company has focused on organizing its sales force similar to IBM where EDS holds the formal contract with its Enterprise customers and other groups are pulled into accounts when needed.

Exiting PC Business

The other similarity to IBM is HP’s announcement to explore alternatives for its Personal Systems Group (PSG) that “could include the possibility of a separation of PSG from HP through a spin off”.  This announcement is particularly significant considering that HP is the global market share leader in PC shipments with approximately 18.5% share. The Personal Systems Group accounted for nearly $41B in sales in FY2010 roughly 1/3 of the company’s total revenue (see chart below), but has among the lowest earning margins at around 6%.  HP’s exit from PCs strongly states to its investors and organization that HP is not just interested in big revenues; it is more interested in strong growth and profitability for the company.

 

* SAI Chart of the day

Reversing Its Strategy on Mobility

HP has decided to retreat from its recent move into mobile devices and operating systems by discontinuing operations related to mobile devices. HP has suffered with the low acceptance of WebOS-based smartphones and recent tablet offerings and faced an extremely competitive environment in keeping up with Apple, Google and other players. In a news story this week, BestBuy requested HP to take back their unsold TouchPads. According to Information Week, Best Buy received 270,000 TouchPads from HP but has only sold 25,000 units. With disappointing sales performance, Best Buy wants the tablets removed from their inventory system.  In the earnings call, HP stated it had already lost $330 million in regards to webOS. The direction is to stop any development in webOS hardware and investigate opportunities for licensing and/or selling the operating system and 1,500+ patents HP picked up when purchasing Palm Inc. just over one year ago.

Implications for Imaging and Printing Group (IPG)

Mr. Apotheker stated that IPG is a profitable area to the business garnering double digit margins and having a strong commercial impact. He also mentioned that there is significant synergy with IPG in enterprise services and strategically with Managed Enterprise Services. He gave no indication that HP has any plans to spin off IPG (like IBM did when selling its Printing Systems division to Ricoh).

IPG may be slightly affected by HP no longer selling branded PCs (benefits from brand advertising, presence in retail stores, bundling), but IPG will also be free to work more aggressively with other PC vendors that may be interested in printer/PC bundling (e.g. Toshiba, Acer, Apple). Over the last year IPG also has been emphasizing its line of webOS-enabled printers. While IPG may continue to develop web-enabled printers and provide web services that support printing, the role of webOS is clearly in question. IPG may be better served to work with the leading mobile OS vendors for mobile print solutions.

Autonomy

Autonomy has been successful creating solutions that manage and analyze content and data. Specifically, they work to “make sense” out of content and data of all types for specific purposes. Autonomy is particularly strong in the legal world, providing regulatory controls, records management, and eDiscovery solutions. They are also getting deeper into social media, both in the realm of regulatory compliance, and external social listening. They also have a Digital Asset Management solution (Virage MediaBin, which was gained through acquisition by Autonomy), which they classify as a solution for “Rich Media Management” that boasts an admirable client list.

In April, HP launched an information management strategy providing an overview of content across the enterprise, which is also when they are rumored to have begun discussions with Autonomy.  Analytics may have a play here as Autonomy has a proprietary technology IDOL (Intelligent Data Operating Layer) that analyzes information for meaning based on content and context. It was used to build their “meaning based” marketing solution Multichannel Analytics.

HP’s acquisition of Autonomy also greatly strengthens their position in the growing market for marketing automation and cross media technology and services — a big gap in HP’s current solutions portfolio. Over time HP may look to integrate Autonomy with its production document and print-related software (e.g. Exstream, SmartStream Director) with managed services to provide end-to-end solutions for enterprise accounts and marketing service providers.

The rumored price of $10 billion is quite substantial at roughly 16 times Autonomy’s forward revenue and 64 times price-to-earnings. HP appears to be in a hurry and does not want any other suitors pursuing Autonomy. Coming on top of Google’s $12.5 billion planned acquisition of Motorola Mobility and the Apple/Microsoft $4.5 billion purchase of Nortel patent portfolio, it appears several of the big IT players have decided to invest some of their large cash positions.

HP — Creating Ecosystems

The story here is about creating the right ecosystems for the right markets.  The ecosystem is not just about services; it is a combination of services accompanied by state-of-the-art hardware and software. IBM still generates a significant amount of revenues from their server hardware business and it is an important piece of the enterprise services ecosystem they have created.

Apple’s hardware has made a significant impact on the industry, but it has been the combination with services (iTunes) and software (music content/apps) that has made them successful. Google’s plan to purchase Motorola Mobility (seemingly for their IP) is based on having better control over their ecosystem and participating in the full set of revenue and profits from devices, software and services; clearly hardware is NOT dead.

For HP, this new direction is better focused with all the right elements of high-value hardware, software and services to build and manage enterprise business/knowledge/marketing systems.  It is how HP will integrate its new acquisitions with its IPG hardware (MFP’s with document workflow/document management and production printers with multi-channel communications) along with its other hardware businesses (server and storage) that will demonstrate their strength and ability to deliver the right ecosystems, to the enterprise market in a timely manner.

Implications

For PC vendors — They are cheering HP’s move. There could be a play for one of the other vendors to take over the HP PC business.  However, PCs are a commodity market with relatively little IP except for the brand. A spin-off company (e.g. Lenovo) would be a major competitor, but there will likely be significant share shift over the next 12 months.

For Printer vendors — No significant change. HP is still number one in most of the segments and regions in which it participates. There may be some minor impact on the low-end of the consumer and SMB market, but the HP printer brand and distribution channels are very strong. Look for HP to continue emphasizing Managed Print Services.

For Enterprise Services vendors — HP is betting a big part of its future on this area. The acquisition of Autonomy will strengthen some of HP’s software and services portfolio, but for the short term HP senior management will be focused on disengaging from PCs and mobile devices while figuring out how to integrate and leverage Autonomy. Long term HP will be a formidable competitor.

 

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