HP's Identity Crisis Continues
HP's problems go much deeper than poor sales in core businesses and some alleged accounting mischief by Autonomy.
I'm not sure what's worse, the HP earning calls where Meg Whitman just reports progress on HP's slow slide into becoming Dell, or the ones where she drops bombshells like saying Autonomy messed with its books before HP purchased it. Either way, it's a melodrama that mostly confirms the opinion many investors have long held: The road to profitability will lead to a much smaller company -- and one that hopefully has some focus.
And not just any focus, either. A smaller HP must find a niche to own, much as IBM hung its hat on high-end services and consulting. But that type of deliberation doesn't seem to be happening. At one time, HP talked about secure, cloud-based information management. Company officials actually referred to it as "anytime, anywhere access," but they were, at least in part, implying cloud. That effort would be led by Autonomy, bolstered by technology from ArcSight, Fortify and TippingPoint, and further enabled by HP services, networking, servers and storage.
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It wasn't a bad story. Except, that is, that it relied almost completely on software -- something HP has never been known to do well. The way around that is pretty simple: Buy good software companies and do your level best to leave them alone culturally. The road to a cohesive product portfolio is certainly longer than if you have a history of good software lifecycle management, but not as long as attempting to grow that competence from the ground up.
To that end, the acquisitions of ArcSight, Fortify and TippingPoint (part of HP's 3Com purchase) all happened in 2010, followed by Vertica and Autonomy in 2011. The good news is that HP's software business is now in fact doing pretty well, growing 14% year over year for the last quarter with an operating margin of 27%. Software services revenue was way up, with a 48% jump. Networking sales improved a bit too.
Unfortunately, that's about all the good news. Printing revenue is down, on both the consumer and commercial sides. PC sales are slumping in both markets, too. Yes, these are tough times for all PC vendors, but even so, HP's losses here outpace the average by about 50%. Server and storage sales are also down. But it was the business critical computing, or BCC, systems unit that took the worst hit. No matter that Oracle was smacked down in court over unilaterally pulling support for HP's Itanium; smart IT managers are beating an orderly path to the exits.
So in terms of a strategy, HP will still focus on enterprise software and wait a while to see what happens with Windows 8 -- which is what HP management appears to be doing both for servers and desktops/laptops. There seems to be great hope that the HP/Microsoft partnership will bear sufficient fruit to show that HP should still be in the business of making end user devices. HP can bet on it; I wouldn't.
In an overall sense, Whitman, while not being particularly bold, seems to be methodically cleaning house. One can argue that current austerity measures are too severe, but buying trends tend to indicate she doesn't have much choice. With no acquisitions in 2012, it's been a year to play out the hand she's been dealt and hopefully get some good news as Windows 8 hits the market.
The Autonomy debacle does bring one significant question to the fore, however. After a string of bad purchases and worse staffing decisions, why on earth is Ray Lane still there as board chairman? Coming to HP through its acquisition of EDS is a somewhat dubious start in itself, given the lackluster performance of that acquisition. Though Lane wasn't board chairman at the time of the Palm acquisition, he certainly played out every bizarre possibility with the company -- including attempts to put the PalmOS into the public domain, one assumes in hopes that it would become another Linux.
Few thought much of the Palm buy at the time, and while the technology had some merit, the assumption that HP could muscle it into competition with Android, iOS and Blackberry showed a fundamental misunderstanding of what HP customers want from HP.
Poor handling of Mark Hurd's firing, a board spying scandal and the ultimate choice of Leo Apotheker was another bizarre string of actions, particularly given that Apotheker had no experience on the consumer or hardware side of the business. Again, the vision that Lane and Apotheker surely must have shared was that of a leaner HP that followed the mold of IBM, serving the needs of elite enterprise customers. The problem is, HP had no business even thinking about making this play given the gaping holes in its product portfolio.
And now we find out that on Lane's watch Autonomy was allegedly cooking its books. While that's somewhat shocking, you didn't have to look too hard at the time to find analyst after analyst saying that HP paid too much for that buy. If they could see it, why couldn't Lane and his team?
All this seems to add up to HP's board viewing HP the way they want to see it rather than the way it really is. That dysmorphia has led to the horrible decisions I've mentioned.
Prior to 2012, HP typically made three to six major acquisitions per year. This year, it's made none. It's doubtful that the company has all the building blocks for whatever management's vision might be for the "new HP." It's also doubtful that growing competency and products internally is the right move, so it's hard to see why it isn't making some acquisitions. Is it the timidity that comes from being insanely wrong on some of its largest purchases, or is it internal disagreements?
I have no idea. But if I were a major shareholder, I think I might want a new chairman.
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