UPDATE: Hewlett-Packard Faces Challenges As It Attempts Remake

Date : 08/19/2011 @ 7:23PM
Source : Dow Jones News
Stock : Autonomy (AU.)
Quote : 2549.0  0.0 (0.00%) @ 1:30AM
Autonomy Corporation share price Chart

UPDATE: Hewlett-Packard Faces Challenges As It Attempts Remake

Hewlett Packard (NYSE:HPQ)
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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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