HP announced third quarter results, and the news wasn’t good. It wasn’t all bad, either – there are bright spots in the portfolio, although not enough. HP’s assessment of the future is upbeat, which seems to have observers all a-twitter (no pun intended.) For me, a fresh look at how HP’s portfolio is structured, and how the pieces are performing, brought its mis-positioning into sharp relief. The fact is, HP is not what it says it is: a strategic enterprise IT partner.
Try this: click the link above. to the (US) HP home page. You’ll find yourself looking at promotions for ink cartridges, PCs, and notebooks. You’re on the “Shop For Home Products and Services” page by default. Now – look at IBM’s home page. Or Oracle’s. Or Cisco’s. Which of these firms begins by talking to the enterprise? Now, to be fair, that’s a simple test, and moving the cursor down the HP homepage you’ll quickly find yourself looking at a very attractive screen or two about hot enterprise topics like virtualization and on-demand computing . [Aug 19 edit – users will find themselves where they were last time. Enterprise and SMB customers will be on appropriate pages for their needs. This is useful for consumers, users who need device drivers, etc. That is a good commercial decision. It reflects a commitment to customers.] But why lead with PCs and printers?
Simple. That’s where HP’s money is coming from, as it has for a long time. Let’s look at the portfolio.
|Segment||%Revenue||Y/Y change||OP % of rev||Change (pts)|
|Imaging & Printing||21||-20||17||2.2|
|Ent. Storage & Servers||13||-23||9.7||-1.8|
Personal Servers and Imaging and Printing represent half of HP’s revenue. And they are hurting. Badly. Where would you focus your attention, if this were your portfolio? If an enterprise prospect came to talk about strategic IT partnering, how would you describe your mix? Combining Enterprise Storage and Servers with Software yields a whopping 16% of HP’s revenue – one sixth – in “enterprise” products. Sure, enterprises use desktop machines and laptops, and they have printing needs too. But are those things “strategic IT?”
Consider how that part of the portfolio is doing: the server business was down 23%, and its margin (formally, operating profit as a percentage of revenue here) is declining. During the results call, a little more detail was offered: blades revenue was down 14%, storage down 21%, Integrity down 34%, ISS revenue down 21%. I don’t claim to be a hardware analyst, and to be sure server revenue is likely to rebound with the economy, but as a portfolio manager I wouldn’t be very excited about this.
Software? A tiny slice of HP’s revenue at 3%, but it’s still going to be over $3B this year, leaving HP as one of the top few software companies in the world. But down 22% – a retreat from over $4B. Sure, margin is up. But it’s not going to move the dial on the portfolio much. The most “strategic” part of the software mix is arguably BTO (the BI and related piece); it was down 22%. There is no apps revenue, middleware revenue, developer revenue – those things are absent from the portfolio. Not for the first time, I’ll say that HP would have gained more from Sun’s software than Oracle will, or IBM would have. A missed opportunity.
Services looks like a big winner now, and in hindsight the EDS acquisition looks to hav3e been a great play. As Anthony Miller points out in his look at HP services, Services now generate 43% of HP’s profit. (Laying off 24,000 plus people after the EDS acquisition will clearly help with margins.) And HP can do well with its Services businesses. It tells a great story about operational excellence, and can deliver. But if that is a strategy at all – and maybe it is for some companies – it’s only one kind of strategy.
This is where we get to who HP is, and who is the real competition. To me, it seems that HP is not competing with IBM much of the time, except when certain kinds of services come into play. And they win their share. But in positioning itself broadly, at a corporate level, HP needs to ask: Is IBM really the major competitor? IBM is driving transformational corporate strategic agendas with services and software, sometimes pulling enterprise-class hardware along. And it’s finding ways to bundle that will improve that story with appliance plays, blades with its software assets installed, etc. HP is not; Exadata is nice – Oracle will sell some, but how many? And when will the Sun version arrive and get more juice?
It’s this simple: HP is not competing with IBM across the portfolio, at least not across IBM’s portfolio. It’s not a software competitor, and is showing little intent to become one. IBM is rolling along with great software revenues and deriving a big piece of its profits there. It’s time for HP to change the story, or get a vision that isn’t limited to one that is essentially undifferentiated – on green, on cloud, on virtualization – compared to other companies. Mark Hurd is running a tight ship very well through tough waters. But where to? Is HP a good company? It’s better than that. It’s an excellent company. But who it competes with and how, feel all wrong to me.