HP’s Growth Slows – Buys Autonomy, Ponders PC Spin-Off

HP Q3 Results Highlights

• Revenues grew 1% to $31.2 billion
• Profits grew 9% to $1.9 billion
• Announces its intention to buy Autonomy
• Talks about finding a new role for its PC division – perhaps spinning it off
• Drops a number of Palm WebOS devices
• Leads the Server, PC and Peripheral markets worldwide
• Needs to consider a more integrated future

HP announced its Q3 financial results last week, complete with some very interesting announcements from leader Léo Apotheker He talked about the acquisition of Autonomy, the dropping of a number of WebOS products from its Palm acquisition of last year and the possibility spinning off or finding a different corporate structure for its market leading PC division.
We wanted to shares some observations about its market position, based on ITCandor’s Market Model. Please contact us if you need access to our pivot tables of market shares and forecasts.

HP Lags Behind Samsung And Apple In ITC Hardware Markets

HP’s share of the ITC hardware market has been falling over the years, from around 8% in 2003 to around 6.5% in 2011 (see Figure 1). One key missing factor since the recession has been phone handsets – a market HP has dabbled in without substantive success. Buying Palm last year didn’t make it a volume player by any means, but its decision to drop smart phone and tablet products last week is odd given the enthusiasm with which it has been pushing WebOS. We don’t know the full extent of its changes yet, but its goal for universal connectivity between its products looks likely to be dented – especially if the PC business ends up in a different organisation.
HP has some very successful businesses. It is the world market leader in Server, PC and Peripheral markets (see Figure 2), with currently around 22%, 19% and 15% market shares in each. While these – along with storage systems – have shown some downward movements since the recession, smaller new businesses have been rising – especially outsourcing (mainly through the acquisition of EDS), Infrastructure software (where it bought a number of specialist companies before shifting its emphasis towards security products) and networking, where its acquisition of 3Com is clearly showing dividends in its ESSN division.
The acquisition of Autonomy will help it compete in the market for business analytics – a market in which IBM (with its workload optimised systems), Oracle (with Exadata and databases), Teradata are enjoying strong sales. Earlier this year HP announced a partnership with Microsoft for business analytics, which seems likely to fade as a result of its Autonomy purchase. Autonomy is of course a Cambridge UK based company – a very bad name for an acquired company.

Old Competitors In Server And PC Markets

HP sits at the head of server and PC markets (see Figure 3 for its position in the year to the end of June 2011). While the former is almost entirely ‘owned’ by American and Japanese suppliers, the latter includes Chinese and Taiwanese players in strong positions. Of these Lenovo, now in third place may offer HP some inspiration for what a successful spin-off might achieve. IBM, fed up with the low margins sold off its PC business to Lenovo in 2005. This astonished industry analysts at the time, but has proved sensible for both parties – IBM, because it allowed it concentrate on the business market and high profits and Lenovo, because it could exploit its Chinese status to sell to many new users. Currently Lenovo is booming, while Acer fades.
If HP does spin off PCs it will be astonishing, given the furore which it accompanied its acquisition of Compaq in 2001.
As always in consumer markets ‘the elephant in the room is probably and fruit’ – Apple’s incredible success makes HP’s consumer business look old and clumsy. We calculate that Apple’s total revenues were only $2,8 billion behind HP’s in Q2 – so it surely won’t be long before it overtakes. A vibrant device business is important for selling computing to the younger generation and HP will surely lose out if it separates its two businesses. It might do better to try to integrate its PC and Printer businesses a bit better and shift away from its dependency on the Microsoft-Intel form factor which looks likely to fade over the next few years – see our earlier market analysis.

Some Conclusions – The Stock Market’s Malign Influence

As an analyst I watched Digital and Compaq’s decline – both of which were hurried along by the desire of their leaders to please an antagonistic Wall Street. Of course as an industry analyst I have a vested interest in seeing our suppliers prosper. I surely hope that the same isn’t happening to HP now. We’ve stressed the difficulty the company has in competing with more vertically integrated suppliers – an issue it is resolving partially through buying specialist going-concerns such as 3Com and Autonomy and partially through trying to build different partnerships with Microsoft. Oracle’s withdrawal of database development for Itanium servers is a reminder of the new rules of engagement perhaps.
Over the last three quarters HP’s revenue growth has slowed from 4% to 3% to 1%, while in the IT market its net profit lags behind Apple, Microsoft, IBM and Samsung. We believe the company should build on its clear innovative ideas and offerings by breaking down its internal silos and embracing a more integrated future.
Let us know if you agree by commenting here of course.