UPDATE: Hewlett-Packard Faces Challenges As It Attempts Remake
August 19 2011 - 7:23PM
Dow Jones News
Hewlett-Packard Co. (HPQ) is unlikely to reboot its business by
selling its personal-computer operations.
On Thursday, the Palo Alto, Calif., tech giant said it wanted to
refocus its business around services and software aimed at business
customers. To do that, the company said it was looking to sell its
personal systems group, the consumer arm of the world's biggest
computer maker.
The problem with that plan, analysts and investors say, is that
some of H-P's remaining businesses, such as information-technology
consulting and printers, are seeing earnings growth slow and
margins narrow. Worse still, both of those businesses are leveraged
to the PC operations the company wants to unload.
"You want to do these radical changes from a position of
strength," said Shaw Wu, an analyst at Sterne Agee. "This is not
exactly the best time to do this."
H-P is trying to manage its transition as similar challenges
rock the technology sector. With a few exceptions, computer makers
face a market characterized by price competition and weak demand
from both corporate and individual customers. Growing concerns
about a weak global economy compound the outlook not only for H-P,
but for its competitors as well.
Still, H-P's tightly threaded business model magnifies its
difficulties. As the PC business it is trying to sell stagnates, so
have support contracts for technology services, a trend that weighs
on H-P's high-margin consulting business.
Operating margins for the services business was 13.5% in the
company's third quarter, down from 15.7% from a year earlier.
Brian Marshall, an analyst at Gleacher & Co., said those
margins will likely face more pressure as H-P embarks on a planned
investment in the business that coincides with a low ebb in
corporate spending.
"The entire IT services industry has no growth," Marshall said.
He estimated margins for H-P's services business will hover at
around 12.5% for the next four to six quarters.
The picture isn't much prettier at H-P's printer arm. While
printers themselves are low-margin machines, the special ink they
use is high-margin and creates repeat business.
However, the printer business has faced difficulties caused by
the earthquake in Japan. Supplies of key components have been tight
and prices high. While the impact will wane over time, H-P has
already seen its printer group's margins slip.
The operating margin for the group slipped to 14.7% in the most
recent quarter from 16.9% a year earlier.
Of course, H-P is putting money behind its new strategy. As it
announced its intention to exit the computer industry, the Silicon
Valley icon said it was plunking down more than $10 billion to buy
Autonomy Corp. (AUTNY, AU.LN), a U.K. maker of software used by
companies to manage the increasing amounts of digital information
they need to store.
An H-P spokesman said the acquisition would broaden its software
offerings and differentiate it in the marketplace. He also noted
growing sales in some of its businesses.
And the company's data center business--which sells servers,
storage and networking equipment--posted 7% revenue growth
year-over-year, though it posted a slight fall in earnings. Data
centers are seen as a growth area as more information is stored and
processed via cloud computing.
Still, exiting hardware might help H-P's margin but hurt revenue
at its remaining business units. That's because the company takes
advantage of its PC sales to sell customers suites of services and
fleets of printers, a tactic known as "bundling." Sales in those
higher-margin units will likely be hurt when the PC business
disappears, analysts say.
"I ask customers what makes H-P so special and they say it's
because they bundle better than anyone else," said Wu, the Sterne
Agee analyst. "Bundling a computer or printer with services
contracts has helped them get sales."
H-P shares closed down 20% at $23.60 Friday.
-By Ian Sherr, Dow Jones Newswires; 415-439-6455;
ian.sherr@dowjones.com
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