HP at a Crossroads

Heads are rolling at {complink 2376|Hewlett-Packard Co.}, as new CEO Leo Apotheker moves to streamline the company and drive it deeper into enterprise software, cloud computing, and services.

Apotheker took over in September, following the ouster of Mark Hurd amid a sexual harassment scandal. He hasn't had much of a honeymoon period, spending his initial days at HP trying to avoid being drawn into an intellectual-property theft trial in which Oracle was suing his former employer, SAP.

Early on, Apotheker did make some noise about elevating the importance of software, but quite frankly, many observers (myself included) took that as a statement from a software-centric executive who hadn't yet truly acclimated himself to the more hardware-oriented HP.

So it came as something of a surprise how forcefully Apotheker has swung into action over the past week. The catalyst appears to be HP's good-news/bad-news financial picture.

On the plus side, HP last week reported solid fiscal second-quarter results: Revenue of $31.6 billion was up 3 percent year-over-year, and net income of $2.3 billion was up 5 percent for the same period. Unfortunately, HP nevertheless got dinged by Wall Street on account of poor PC sales — down 5 percent for the quarter — and for reducing its fiscal third-quarter and full-year outlooks due to continued softness in sales of consumer PCs and reduced profit expectations for its services business.

Yet Apotheker was apparently already at work addressing that softness with a dose of cost-cutting, according to a leaked May 4 memo in which he wrote, according to The Wall Street Journal, “We must watch every penny and minimize all hiring.”

That memo, and Apotheker's shakeup of HP's executive ranks — three senior vice presidents, including networking head Marius Haas, are reportedly departing — shows that the new CEO has initiated a hands-on course correction.

If all this sounds a lot like what's been happening recently to Cisco we shouldn't be surprised. Challenging economic times — we are in a recovery but not fully recovered — put particular stresses on the tech giants. (See my prescription for four steps to revive Cisco: As Embattled Cisco Shutters Flip, More Cuts Are Certain.) Unfortunately for Apotheker, whose previous reign as president of SAP was adjudged less than a success, he's not going to get much time to right the ship.

So what should he do? The way I see it, HP's problems are pretty simple to identify, yet difficult to fix. Like everyone else, it's caught amid the transition to a post-PC world. Whether the new era will really be all cloud, all the time, as the hype would have one believe, I think we can agree that software/infrastructure/platform (and whatever else you want to call it) as-a-service is more than a passing fad. It's going to be the method of delivery for a large portion of enterprise computing of the future, and probably for many consumer services, too.

What makes things tougher for HP, as compared to, say, {complink 2470|IBM Corp.}, is that HP remains heavily reliant on PC sales. (IBM sold off its PC division to Lenovo in late 2004.) As Apotheker put it to financial analysts last week: “Even though our consumer PC expectation has been cautious, the steepness of our Q2 decline is greater than what we had anticipated.”

It's ironic that HP, a company that made its bones innovating in test equipment, microwaves, and minicomputers, has become so synonymous with commodity businesses like PCs and printers. Overreliance on the former is a legacy of Carly Fiorina, who bought Compaq for $25 billion in 2001.

Apotheker now appears to be taking a page from IBM's book of a decade ago, by looking to the higher-margin services business as a way to offset weakness in low-margin PCs. Here's what HP's second-quarter earnings press release had to say about services, which in Q2 grew 2 percent year-over-year in revenues with a 15.2 percent operating margin:

“To improve long-term performance, HP is accelerating alignment of the services business with the company's overall strategy, including making investments to drive more value-added solutions and migration to the cloud.”

I should note that HP has a sound enterprise computing strategy with which to compete against IBM, Dell, and Oracle (Oracle now owns the server business of Sun Microsystems). HP also has a solid networking play, in the form of a business it previously called HP Procurve but is now bringing under the HP brand.

I point this out because one can't have a successful services business without selling the enterprise computing, storage, networking, and software pieces of the equation. You need that “real” stuff so you can surround them with consulting services — helping enterprises buy, install, and effectively use everything.

HP has all this. But what you may get from my lengthy disquisition is that what HP's been lacking is merely clarity of branding, purpose… and just what it is and does. Which means it's up to Apotheker to make HP simple, if it's to succeed in the soon-to-be-here post-PC future.

6 comments on “HP at a Crossroads

  1. AnalyzeThis
    May 24, 2011

    I think this is a good summary, Alexander. As you say, I think that HP's problems are simple to identify, yet difficult to fix.

    Still, despite the issues, I think HP is in pretty good shape. Yes, the whole Mark Hurd situation was… less than ideal… but given the circumstances I think they have dealt with all that rather well.

    While in hindsight things like paying $25 billion for Compaq seems rather silly, I do think it's clear that HP has adapted better to the industry's new era better than most of their former competitors, many of whom no longer exist or have long since been swallowed up in acquisitions.

    And speaking of acquisitions and the soon-to-be-here-post-PC future you mention, the acquisition of Palm does seem to be a good strategic fit, yes? And Palm obviously cost of a small fraction of what they dished out for Compaq years ago. Perhaps a better value as well?

  2. Nemos
    May 24, 2011

    Because I didnt Know what is cloud computing I found this on the Internet I hope it will help.

  3. Alexander Wolfe
    May 24, 2011

    Thanks for the kind words, DennisQ. Regarding Palm, it will be interesting to see if HP does indeed release PCs running WebOS. It will be even more interesting to see what the level of uptake is. Given the so-called “consumerization of IT,” where every platform under the sun is giving Windows a run for its money, it's not inconceivable that these could make a dent, though I have to admit I remain a bit doubtful.

  4. SunitaT
    May 29, 2011

    Hewlett-Packard’s disappointing forecasts reflect rivalry from tablets such as Apple  iPad and lower margins in the computer-services division. Needs to be seen if HP will emulate its PC market success in the tablet world when it launches the Touchpad over the summer. 

  5. Mydesign
    May 31, 2011

    @Nemos, cloud computing a simple concept of renting the resources. For example your company needs a server for a short period of time; you don’t have to invest for buying server. Instead of that you can approach the cloud service providers like Amazon, VM Ware etc, they will provide a connectivity between your company and their server, so that you can be used it according to your requirements. For this service they will charge you on pay as you go basis (usage). Like that you can use many types of resources for data backup, storage, web services etc.

  6. Nemos
    May 31, 2011

    Thanks a lot Tom , your explanation is very understandable.

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