Is HP Really A Strategic Enterprise Partner? Disappointing Q3 Betrays Gaps

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)
Services 31 93 15.2 2.3
Personal Systems 31 -18 4.6 -1.1
Imaging & Printing 21 -20 17 2.2
Ent. Storage & Servers 13 -23 9.7 -1.8
Software 3 -22 18.1 5.7

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.

About Merv Adrian
Gartner Research VP, technology analyst and consultant, 30 years of industry experience, covering software mostly, hardware sometimes.

13 Responses to Is HP Really A Strategic Enterprise Partner? Disappointing Q3 Betrays Gaps

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  2. Phil Hassey says:

    Hi Merv, good sentiments. I worry as well about the services picture. It is hard to get a like for like understanding of the HP legacy business as EDS is effectively dropped on top. It is worth noting that in Q2 services grew 99%, Q1 it grew 116%. The underlying business is challenged, this is not a surprise given the importance of hardware pull through.

  3. Merv Adrian says:

    Not my patch, but I imagine we’ll see some commentary pretty soon.

  4. gerryvz says:

    Merv,

    I’ll do my best not to be defensive or too much of a shill with my comments here, but there are a few points on which I’d like to offer my perspective.

    In my opinion, your observation about HP’s home page focus is a bit anecdotal. Few companies have the breadth (not to mention multi-decade legacy) of products to explain and support that HP does, from both a consumer and an enterprise perspective.

    I know that solid research has been done in the past about the volume and topic of searches and inquiries done to HP.com, and a high percentage of them are consumers looking for software updates and drivers for their printers and PCs. The current design in part reflects that research, but I wouldn’t say that it’s a strong indicator of HP’s lack of focus on being a strategic enterprise IT supplier.

    In addition, from a technical standpoint: I believe HP’s site utilizes “cookies” that use one’s past activity on the site to orient the pages used for landing on future visits. This means that if you last visited the site to look for a printer driver, then on your next visit it will land you on a “consumer” type of page. If you last visited HP.com’s enterprise or SMB areas, landings on future visits will reflect that assumed preference based on your previous page views.

    With regard to revenues in various hardware business groups being down. That shouldn’t be a surprise, given the severity and globality of the current recession. I think the more important questions to ask are:

    * how are HP’s revenues compareing to its key competitors? And more importantly,

    * is HP taking or losing market share from these competitors?

    By both measures, I’d say HP is maintaining parity with (at minimum) and even outperforming its competitors.

    With regard to HP and software: this is a complicated area, because software is distributed all around HP — in HP Software & Services (HPSS), Enterprise Storage & Servers (ESS), HP Technology Services (TS) and HP-EDS, and in the Inkjet & Printing Group (IPG). So looking at HPSS alone provides a VERY incomplete picture. Much of the “apps” and “middleware” software you mention actually has resided in HP-EDS since the acquisition went through last August.

    Bottom line: if you sliced HP’s collective software revenues & capabilities together (which is what IBM does), the picture would be quite a bit different, and likely eye-opening to you.

    On to the topic of competing with IBM. I would say that IBM (from a size, industry presence, brand, and portfolio perspective) probably is HP’s largest current competitor. But that doesn’t mean that HP has to emulate IBM, or should …. or even wants to. I personally believe that HP has made many strategic decisions that take it on a strongly diverging path from IBM, and one I ultimately believe will be more successful.

    That said, both HP and IBM recognize that Services will be a key growth driver and strategic differentiator in the future. Most other vendors haven’t realized this yet. IBM does have a multi-year jump on HP in terms of re-orienting itself as a services company (not that Carly didn’t see the value of Services, and PWC, first and try to act on it!!), but don’t underestimate HP’s resolve here.

    I’d most strongly disagree with your theme with regard to HP not being a strategic enterprise player. I can’t think of a single industry player with the breadth and consistency of leadership (i.e. #1 or #2 in most all markets) that HP’s portfolio of products and services have, globally.

    HP’s actions over the past 5-10 years to re-orient and strategically augment its portfolio should be a good indicator of its future direction and intent. And I would say, that would be to become even more of a strategic enterprise IT solution provider.

    Best regards,
    Gerry

  5. Merv Adrian says:

    Gerry, thanks for a thoughtful and detailed comment. Some quick thoughts:

    – Your point about the home page is spot on – it does take the visitor back where they were (I’ll not that in the post today.) It was, as you say, an anecdotal example. I wanted to show that HP is focused on what generates revenue, and I don’t disagree that providing those services, drivers, etc is vitally important.

    – I didn’t comment much on the direction of revenue, or share issues, because HP is holding its own, and I believe the rising tide will lift HP like its competitors. For that reason I didn’t dwell much on the data – it speaks for itself, and is more about the economy than about HP.

    – As for HP Software revenue, the definition is HP’s, not mine. If HP chooses to report its software revenue in a way that does not highlight its strategic significance, I can only respond accordingly. Device drivers, OSs, and “close to the hardware” systems management don’t represent a software strategy – those are not things you compete on. They are necessary, but not sufficient, to be an enterprise software player. On the other hand, OpenCall, BTO – both of which I believe are in the number, do represent strategic, competitive plays. And they are a tiny fraction of the portfolio, which doesn’t contain offerings in other key areas like development, collaboration, BI, applications, etc. If HP has a definition of strategic enterprise software that doesn’t include those things, it’s time to bring it forward. Otherwise, HP Software is a niche play, not a strategic one.

    – I raise IBM as a competitor because few other companies have a similar portfolio and a direct sales model, and HP itself invites the comparison often. I agree HP doesn’t need to emulate IBM, and the portfolios are different. What I don’t hear is HP describing the value of the portfolio differences. What I do see is the similarities as I said – green, cloud – the usual suspects.

    – Services is key, and HP’s recovery from the PWC debacle was a good one. EDS should be more than a component of the financial performance, and I don’t doubt that as the massive integration is completed, it will take its rightful role in the articulation of the HP vision. What I heard in the call was mostly how the financial performance contributed.

    Again, thanks, Gerry. I’m hoping to hear an HP vision that explains how the portfolio makes it strategic. I agree that so far we need to (paraphrasing) “read HP’s actions over the past 5-10 years as a good indicator of its future direction and intent.” That’s not good enough to be a leader, or to be seen as a strategic enterprise solution supplier. I don’t underestimate HP’s resolve, or the value of its assets. But the story needs to be rolled, told – and sold.

  6. Nina Lytton says:

    I think it’s disingenuous to wonder whether HP is competing with IBM. HP doesn’t have to parallel IBM in every respect to be a competitor to Big Blue and a strategic supplier to the enterprise. As a lever against IBM’s then monopoly, even Amdahl (vendor of the famous mug) was “strategic.” That said, I question whether thought leadership in this industry is possible without involvement in applications development. Your thoughts, Merv? Nina

  7. Merv Adrian says:

    Delighted to have you commenting here, Nina! I think you go to the heart of it. If it’s possible to be “strategic” and a thought leader in the IT realm without enterpise apps and/or a significant subset of the components required for their development and deployment, HP needs to explain how.

    I don’t know that it’s disingenuous to wonder about the competitive question. It might take a bit more nuance to get to what I was groping toward in the post (which was just that – a quick post, not a deep analysis.) Here’s what I was after: being a strategic supplier is not the same thing as being a strategic IT partner. HP is certainly a strategic supplier to many companies. We know they aspire to be more, and have made some acquisitions, notably in the services realm, to get there. To your point, in the IT realm, it’s hard to influence IT strategy without a broad software story. So I’m waiting to hear that and see it start to take hold.

  8. Bob Sakakeeny says:

    I like this blog, and it’s related “Tweets,” because it gives the sense of a conversation started by Merv, rather than mortals reacting to god’s word.

    Given my history with HP, I’ll use only publically available info in this response.
    For Phil, until the EDS purchase, HP’s service revenue of ~ $15b was mostly from break-fix work ─ as reported to IDC, Gartner, etc. = which was declining for obvious reasons. So, any increase is directly related to EDS buy.

    For Gerry, HP.com is controlled by Corp Marketing, which is controlled by a team which can not spell enterprise. They are totally devoted to the “consumer” and believe that even CIOs are also consumers who will buy for the data center when they have a good experience with HP at home. At HP Corporate, anyone with an enterprise “bias” is gone, and the new team even got rid of the optional hp.com start page that Gerry talks about to save money. Additionally, for most of the company, IBM is not the major competitor. It is for the TSG division Gerry works for, but for IPG and PSG IBM is not a player.

    Gerry is right that HP is #1 or 2 in all enterprise product categories, but most of that is box counting. Most enterprise buyers still do not see HP as enterprise focused, but will buy their kit because of its relative quality/cost ratio, but still see HP as a PC company.

    Gerry, and all his AR peers in all HP divisions, report to PR. There is no career path for AR, and there is no hope for internal influence for AR. So, the brave outspoken Gerry and other HP AR folks need to look elsewhere to advance or be satisfied with learning how to spin. In the mean time, his bosses cringe at the “audacity” of his unauthorized communications 🙂

    Nina’s comments and your response nails the real issue. HP has a lot going for it to be a “thought leader” in several areas, and its public language supports its efforts to be so. But, its behavior shows that it can not sustain any effort to be the thought leader given its laser-like focus on this quarter’s bottom line.

    Mark is a wonderful CEO, but his vision does not go beyond the bottom-line. He will keep this huge IT vendor profitable, and will maintain HP as the “world’s largest IT firm!” My view is that HP needs a COO like Mark to keep the trains running on time, and a leader like Carly to make sure the trains are going to the right place. But, neither could share the stage or admit their limitation.

    So, buy the stock short term, but stick with IBM (and Google, Oracle and others) for true though leadership.

  9. Merv Adrian says:

    Thanks, Bob, and especially for getting te “sense” of the blog – a conversation. I’m opinion-mongering here in ways designed to foster exactly this kind of dialogue. And I return to the nuance I first mentioned in my response to Nina – enterprise suppliers are not the same thing as strategic partners. My opinion: HP can bid to be the latter, but the portfolio, and inevitably the conversation, are still being dominated by the former.

  10. Rob says:

    Couple of points on HP.

    HP’s consumer business makes it a less dependable proxy for aggregate IT spending than IBM. But HPs software is a better proxy for software than IBM – as I expect that most of IBM software is a fungible accounting entry of where to book mainframe recurring revenue (hardware or software).

    I disagree with those that criticize Hurd. The big problem at HP for decades was interdepartmental maneuvering and politics. It is still pretty bad but not nearly as bad as under Platt or Carly. He needs to focus the company on business, not BS, and he is doing it.

  11. Pingback: HP Scores Big Win « Market Strategies for IT Suppliers

  12. Arvin says:

    Sorry to come in so late to the discussion. HP carries a lot of ‘box vendor’ baggage, both from printers etc & the Compaq legacy volume orientation. Truth is, most HP enterprise sales are application agnostic which makes the company hard to position as ‘strategic’. This background has chewed up several strategic moves: PWC, Knightsbridge, Tandem and Digital, and possibly NeoView as well.

    IBM, coming from the data center, was always strategic, especially once it jettisoned the alluring PC commodity business. Even so, IBM needed to massively re-orient to the services mantra. Perhaps HP will get there, too. As a former employee and still stockholder, I hope so!

  13. Merv Adrian says:

    Thanks, Arvin. I see evidence that HP is getting some “strategic” traction in a few of the wins touted of late. But the message is not being spread aggressively in the market the way it is at IBM, to be sure. From a parochial point of view as an analyst, I can tell you that the marketing communications function is an order of magnitude less visible. IBM allocates a lot of resources to telling its story, and it gets correspondingly better coverage.

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