HP Trying To Become A Software Company

According to recent IDC and Gartner reports, global personal computer shipments in the second quarter increased less than the percentage anticipated because of sluggish economies and a shift toward smartphones and the iPad media tablet. Worldwide PC shipments increased 2.6% compared with 2.9% projected earlier by IDC. While HP remained the market leader in PC sales, PC shipments fell 0.6% over the year in the second quarter and Dell saw a bigger decline with number of units sold declining 10.2% over the year. Apple, however, continued to gain market presence, with annual shipments increasing 15% over the year driven by iPad sales. Meanwhile, declining PC sales led HP to consider spinning off their PC segment, a move I thought had made sense years ago when IBM spun its off and sold it to Lenovo.

HP’s Financials
HP (NASDAQ:HPQ) saw Q3 revenues grow 2% over the year to $31.2 billion, in line with the market expectations. Their software revenues rose 20% to $0.78 billion and services revenues climbed 4% to $9.09 billion. However, revenues in the printer segment fell 1% to $6.09 billion and from the personal systems group fell 3% to $9.59 billion. EPS of $1.10 was a penny above analyst expectations.

For the current quarter, HP forecast adjusted revenues of $32.1 billion-$32.5 billion, well short of the Street’s expectations of $33.98 billion. EPS of $1.12-$1.16 was also significantly short of analysts’ expectations of $1.32. The company also lowered its full-year guidance to revenues of $127.2 billion-$127.6 billion, compared with earlier projected revenues of $129 billion-$130 billion and market projections of $129.12 billion. EPS for the year are now projected to be $4.82-$4.86, compared with the previous quarter’s outlook of $5.00 and short of analysts’ estimate of $5.01.

HP Plans to Exit Personal Systems Segment
HP has been concerned by the growing presence of tablets in the market, which has eaten into PC’s share. Not only is the PC segment a low-margin business, but HP is also finding it difficult to compete with the likes of the iPad. Because of the weak performance of their recently launched tablet, the TouchPad, the sales of which are not meeting expectations, HP announced its plans to spin off their Personal Systems Group, which largely consists of the PC and the TouchPad business. Instead, they will focus their efforts on cloud solutions and software while expanding and leveraging their technologies, printing hardware, software and services. Many believe that as IBM had done earlier, HP will be able to sell off their PC business to China’s Lenovo or South Korea’s Samsung. I am not convinced that Samsung wants to get into the PC business, but for Lenovo, this is certainly a market share enhancing opportunity, and they may take it on.

As part of the strategy, HP will discontinue operations for Web OS devices, specifically the TouchPad and Web OS phones. By October of this year, they will stop producing devices that operate on the webOS software. HP had acquired this software as part of their $1.2 billion Palm acquisition last year. HP’s performance has been so dismal that in the recently released Gartner report on market share figures for smartphones by operating system for the second quarter, HP’s webOS was listed under “Others.” Google’s Android continued to be the market leader with a 43.4% share in the smartphone market, followed by Nokia’s 22.1% share. Apple came in third with 19.6 million units, translating to 18.2% market share.

HP Acquires Autonomy
In conjunction with the focus on software business, HP recently announced the acquisition of the U.K.-based software company, Autonomy, for $10 billion. Through the acquisition, HP will have access to Autonomy’s content management and analytics software, thus making it more competitive with Oracle and Microsoft in the enterprise software segment. Autonomy specializes in providing unstructured data analytics and data management software and caters to the $20 billion enterprise information management space and the $55 billion business analytics software and services space. Gartner estimates that 80% of the information generated each day is in the form of unstructured data and that the volume of this data doubles each month, making it a lucrative market. But some believe that at $10 billion, HP has paid a high price to acquire Autonomy, which had an annual run rate of revenues of $870 million. It is said that prior to acquiring Autonomy, HP was also considering acquisitions of infrastructure software maker Tibco and data warehousing technology provider Teradata.

HP’s stock is trading at $23.60 with market capitalization is $48.95 million. The stock had touched a 52-week high of $49.39 in February of this year and earlier this month a new five-year low of $22.75. The CEO transition has not gone well at HP. Mark Hurd’s departure and Leo Apothekar’s entry have caused a complete change in the leadership. Whereas Hurd was a hardware operations type, Apothekar is a hardcore enterprise software man. As a result, we’re seeing HP change course from hardware to software in significant ways. However, the company does plan to keep its printer business intact.

The market feels the jitters, is nervous, and is giving the stock a deserving beating. This is a pity, as I was a fan of the HP turnaround story under Mark Hurd.