Sunday, 21 August 2011

HP gets out of the PC business

The announcement from CEO Leo Apotheker that HP were spending 20% of HP’s value on a relatively small, niche market, software company and at the same time announcing their departure from a 40 billion dollar revenue part of their company can only be viewed as bold and visionary or a complete disaster.
The view from the financial markets was clearly the latter as 20% of the company’s share value was lost within 24 x hours of the announcement.

The following is an email from Todd Bradley, the head of HPs PC division....

To: All PSG Employees
From: Todd Bradley
Subject: PSG Q311 Results and Our Path Forward
Date: 18 August, 2011
When I joined HP six years ago, I came with an appreciation for HP and PSG’s many strengths—its people, its technology, its enviable global business—and a belief that we could become a leader in the PC market. Together, we’ve worked hard to earn that distinction. Today, I look ahead with an even deeper appreciation for this team’s strengths and with a vision for how we in PSG can and will continue to control our destiny.
HP is making big news across many fronts as the company reports its third quarter results. I want to take this opportunity to share my views on Q3 and our path forward in PSG.
First, let’s review the quarter. PSG delivered revenue of $9.6 billion in Q3, down 3% year-over-year. We posted operating profits of $567 million or 5.9% of revenue.
As has been the case in the past few quarters, demand from business and public sector customers was stronger than consumer demand, and our segment performance reflected this. Workstations set the pace for our commercial portfolio and posted another strong quarter, growing shipments at three times faster than the market overall. From a geographic point of view, we had strong results in EMEA, particularly in Russia.
We continued to work through formidable challenges during the quarter as well. Across the industry, soft consumer demand has led to high inventories in the retail channel, which results in highly competitive pricing. Operationally, execution issues at our ODMs limited our overall ability to meet demand. The strategy we introduced to focus our core PC business around distinct customer segments and to centralize our ODM oversight within the Supply Chain and Operations team are intended to capitalize customer segment specific opportunities and improve our execution with partners.
The Future of webOS
This past quarter, we also shipped HP TouchPad. I want to recognize the entire webOS team for the commitment and perseverance they displayed over the past 12 months. While the webOS software experience was widely praised by reviewers and analysts, the response to our hardware was disappointing. And the response to our total product offering in terms of sales has been below our expectations.
After careful analysis of the webOS operation and market opportunity, HP has decided that continuing to execute a device strategy in this market space is no longer in the best interest of HP and HP’s shareholders. We will discontinue the operations for webOS devices, specifically the Touchpad and webOS smartphones by the end of Q4 2011.
Moving forward, we will aggressively explore means to realize the broad potential for webOS software in the market. We are still evaluating next steps and we will share more as we determine the path forward.
The Future of PSG
You have built a PC business that is second to none among Wintel competitors. PSG ships more units, delivers more revenues and earns higher profits than anyone in our category. PSG has grown operating profit in the double-digits in all quarters in 2011, due to lower component costs and favorable customer mix. I hope you are as proud as I am of these facts.
From this position of strength—and motivated by our desire to stay No. 1—we have a unique opportunity to shape our future. The decisions made by HP’s Board of Directors mean that HP will evaluate a range of options designed to maintain our leadership position. These options include a separation of PSG from HP by spinning off the business to shareholders, selling the business, or keeping the business. Ultimately, the decision we make will help deliver the most value we can to customers, shareholders, and you, the employees, in terms of opportunity for challenging assignments and professional growth.
We anticipate that it may take 12 months or more to complete this process, and I am committed to keeping you informed of our progress and next steps. I can’t tell you more specifics right now, and I know that uncertainty can be discomforting. Let me tell you what I do know:
 · Our customers need you to meet the commitments we have made to them.

 · The obligations we make with our suppliers and partners must be respected.
 · Our roadmaps and delivery schedules have not changed.
 · The PC GBU organization we announced remains the way we operate.
 · We win when we act as one team and support each other.

The key points from this email are:

He distanced himself from the decision to get out of the PC business in his statement... “The decisions made by HP’s board of directors...”

At no point did he say he agreed with their decision or supported it in any way?

Mr Bradley clearly feels he has lead a division that has done well and he must be hoping that HP will allow him to lead a management buyout of the division?

So from a business point of view, does Apotheker’s decisions make sense?

Most PC manufactures have struggled to make double digit profit nett profit margins from the PC business and if the largest player in this market can’t do it, then maybe it is impossible?

Recently Mark Dean, a member of the original IBM PC design team stated “The PC era is basically over.”

Mr Bradley’s boast of his unit achieving a 5.9% nett margin looks weak in comparison to Autonomy’s nett margin of 42%.

On the other hand, one of HP’s main competitors, Cisco, is moving in the opposite direction and has launched their own client device in the Cius, their Android based tablet.

HP had just launched their own tablet, based on their own operating system, WebOS and was potentially poised to take a large slice of the growing tablet market created by the Apple iPad.

Apple however have no interest in the business / enterprise market, so the way was, and still is, open for another vendor to supply tablet PCs to this market. HP was well positioned to achieve this, but not anymore.

The one certainty out of this announcement is that any large PC deals HP has on the table are crippled by the lack of future certainty over the product road map.

In his email Mr Bradley says “Our road maps and delivery schedules have not changed”, but this is clearly nonsense as it entirely depends on what HP’s board of directors decide to do next, i.e. if they sell it to another PC vendor such as DELL or Acer, their product road maps will obviously overlap with the existing HP road map. Based on past takeovers, it tends to be the company doing the acquiring who decides whether or not to keep or abandon existing product road maps. Typically senior management of the company being acquired leave or are given golden handshakes, so Mr Bradley’s viewpoint is of little worth at the moment.

When IBM got out of the PC business, they simultaneously announced it was being sold off to Lenovo, thereby at least creating a certain future for the PC division.

At a very simple level, maybe the decision is based on Leo Apotheker’s personal experience?

He spent twenty years at SAP, a vendor of high margin, low volume software products. Maybe he just didn’t understand the low margin, high volume PC business and so is trying to create a new HP that is more similar to the type of company he is personally familiar with.

Either way, Leo can’t lose. Like one of his predecessors, Carly Fiorina who was sacked by the board of HP and given a $20m severance package, no matter how his decisions pan out, he is sure to leave the company several millions of dollars richer, i.e. he can do no wrong.