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HP’s Strategy Under Apothekar

Posted on Thursday, Feb 24th 2011

Hewlett-Packard (NYSE:HPQ) this week reported mixed results and gave a weak outlook that missed analyst estimates and sent the stock tumbling about 12%. This was Leo Apotheker’s first quarter as CEO, and though it doesn’t reflect on his performance, there is no question that it highlights the challenges he will face.

HP’s Challenges
HP, with annual revenue of $126 billion, is one of the most diversified technology conglomerates in the world, and its main challenge is to compete in its varied markets. HP is struggling in its IT services business and the consumer business. The latest quarter reflects these weaknesses, but Apothekar says he is committed to HP’s diversification strategy. Richard Waters on FT.com reports that

“[Apothekar] said that that would mean keeping HP’s feet firmly in both consumer and business technology markets, despite pressures on the consumer side that contributed to its latest disappointing quarterly figures.”

Under the leadership of former CEO Mark Hurd, HP cut costs, went lean to boost profitability, and made significant acquisitions such as EDS, 3Com, and Palm. In contrast, Apothekar has raised salaries to pre-recession levels and increased the company’s R&D spending. However in the earnings call, Apothekar said HP’s approach to M&A hasn’t changed:

“Across HP’s portfolio, we will continue to pursue growth. And we’re continue to pursue growth either through organic innovations, or we’ll continue to partner, or we’re continue to evaluate M&A opportunities to make strategic, operational and financial standing. Only those who actually fit this equation will enter into our imminent equation.”

In an interview with Ben Worthen in the Wall Street Journal, Leo Apothekar says he will focus on profitable growth rather than on cost cutting; more specifically, there will be a focus on “cloud” and connectivity.” Apothekar will be hosting a strategy seminar in San Francisco on March 14 to discuss HP’s strategy and opportunities. On the company’s weaknesses, he says:

“We need to get way more business done in markets other than the U.S. We need to speak to our customers as one H-P. We need to fire up our innovation engine and get our products to market faster. It’s not that we aren’t innovative; it’s that it takes too long to get to market. We have some weaknesses in our software portfolio. And I think we need to be far more outspoken about what H-P is all about. We didn’t do that for many years.”

HP’s Financials
HP this week reported mixed results for the first quarter, beating the profit estimate but missing the revenue estimate. First quarter revenue was $32.3 billion, up 4%. Net income was $2.6 billion or $1.17 per share, up 16% from $2.3 billion or $0.93 per share last year.

During the quarter, Personal Systems Group (PSG) revenue decreased 1% to $10.5 billion with Notebook revenue down 5% and Desktop revenue up 1%. Aaron Ricadela on Reuters reports that sales of PCs to consumers declined 12% in the first quarter and that Abhey Lamba, an analyst at ISI Group, says HP’s reliance on home-computer shoppers, who generate 40% of PC revenue, has left the company vulnerable to a consumer slump.

Services revenue decreased 2% to $8.6 billion, and Apotheker said that HP will seek more lucrative cloud-computing contracts. Imaging and Printing Group (IPG) revenue increased 7% to $6.63 billion. The company’s new ePrint printers, which allow wireless printing, have become quite popular with iPad and tablet users.

HP Software revenue increased 5% to $697 million. HP Financial Services (HPFS) revenue increased 15% to $827 million. Enterprise Storage, Servers, and Networking (ESSN) revenue was up 22% to $5.6 billion with HP Networking, including the 3Com acquisition, growing 183% to $619 million.

HP reported balanced growth in all regions, with accelerated growth of 11% in the BRIC countries (Brazil, Russia, India, and China). Revenue from the Americas grew 6%, EMEA was flat, and Asia Pacific grew 7%. HP ended the quarter with $10 billion in gross cash. During the quarter, it repurchased shares for $2.3 billion and paid dividends of $175 million.

For the second quarter of 2011, HP expects revenue of $31.4 billion to $31.6 billion and EPS of $0.99 to $1.01 versus analyst estimates of $1.25 on revenue of $32.6 billion. HP cut its full-year outlook owing to pressure in the consumer PC and IT services businesses. It now expects revenue in the range of $130 billion to $131.5 billion and EPS in the range of $4.46 to $4.54. Analysts were expecting revenue of $133.1 billion. HP is trading around $43.59 with market cap of about $94.7 billion. It hit a 52-week high of $54.75 on April 16 and a 52-week low of $38.03 on August 25.

Chart forHewlett-Packard Company (HPQ)

Recent Acquisitions and Developments
On the acquisition front, HP recently announced its plans to buy business intelligence software maker Vertica for an undisclosed amount. Last month, HP announced its decision to discontinue its own data analysis software, NeoView, after it failed to catch on. Vertica, on the other hand, is used by more than 300 customers including Twitter, Zynga, and Groupon.

HP continued to make management changes. It recently replaced four board members and added a new director. The appointments include former eBay CEO Meg Whitman and former Alcatel-Lucent SA CEO Patricia Russo.

Early this month, HP hosted a WebOS event where it announced three WebOS-based products: the TouchPad tablet and two new smartphones, the Pre 3 and the Veer. Palm’s WebOS received great reviews but couldn’t quite live up to its potential. With HP’s support, that could change. Devindra Hardawar on VentureBeat says HP’s WebOS TouchPad reveals the iPad’s multitasking weaknesses:

“HP and Palm have finally realized WebOS’s full potential with the TouchPad — a 10-inch tablet that will give the iPad, Android tablets, and RIM’s BlackBerry PlayBook some much-needed competition. WebOS wowed the technology world when it was unveiled in January 2009, specifically because it focused heavily on multitasking.”

Over time, HP expects to bring the WebOS experience to other devices such as PCs and printers. WebOS could turn out to be the one unifying thread across some of HP’s diverse businesses. “Connectivity and cloud” can just about sum up HP’s approach to tie them all together.

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