Hewlett-Packard (HPQ) would be a smaller and radically different company if it goes ahead with plans to unload its $41 billion personal computer business. But it would still face many of the challenges it has struggled with this year.
While PCs have been a central focus of the company for a decade, HP is a market leader in several other sectors, including printers and computer servers. But industry experts say that each of HP’s business segments is under economic pressure, and there are hurdles to ramping up competition with Oracle (ORCL) and IBM in software and technology services, two areas at the heart of CEO Léo Apotheker’s strategy for the future.
“They’re probably several years behind the curve,” said Patrick Sayers, a consultant and long-time analyst following the services industry, who noted that IBM sold its PC business seven years ago as part of its own effort to focus on software and services.
Apotheker and board chairman Ray Lane began meeting with major investors this week to defend and explain the stunning moves the Palo Alto-based company announced last Thursday. HP’s stock rose slightly this week after falling nearly 25 percent on Thursday and Friday.
Citing a squeeze on profits and increased competition from Apple’s (AAPL) iPad and other PC alternatives, Apotheker said last week that HP will consider selling or spinning off its PC division over the next 12 to 18 months. Apotheker also canceled the company’s short-lived TouchPad tablet and lowered the company’s full-year earnings forecast, while confirming a pricey $10 billion software acquisition and naming a new head for HP’s services business.
PC division chief Todd Bradley later told CNBC the review of his operation may be completed in eight to 12 weeks. That implies a decision could be made soon after, although it might take another year to carry out whatever change HP’s board decides to make.
Analysts say there are few likely candidates to buy the PC business. in a statement Wednesday, South Korea’s Samsung appeared to deny interest. HP executives have signaled they might spin the division off as a stand-alone company. Apotheker has said that would let the PC operation focus on developing new products, while HP concentrates on serving business customers.
The steep drop in HP’s stock price, meanwhile, prompted speculation that archrival Oracle might swoop in to buy the rest of the company. such a deal would be costly, however, and many analysts view it as unlikely. an Oracle spokeswoman declined comment.
Apotheker has painted last week’s announcements as part of broader strategy to focus on selling more profitable tech products and services to corporate and government clients. Many experts agree the company could reap higher profits in those sectors, at a time when competition from lower-cost Asian manufacturers is pushing down margins on computer hardware.
While the PC division has been HP’s biggest source of revenue, the division’s $9.6 billion in sales last quarter was almost matched by $9 billion in revenue from the company’s consulting and tech services division. By comparison, IBM had $15 billion in services revenue last quarter.
All told, after subtracting $40.7 billion in PC sales, HP still hauled in revenue of $85 billion from its other segments last year. That’s less than IBM’s revenue of $99 billion last year but substantially more than annual sales of other tech giants, such as Dell’s $61.5 billion, Cisco’s (CSCO) $40 billion or Oracle’s $35.6 billion.
An HP spokesman declined to say how many people work in the PC group, which has offices in Cupertino but operations in other parts of the United States and overseas. Analysts estimate up to 100,000, but their departure would still leave HP with one of the tech industry’s biggest payrolls, since its current global workforce is more than 324,000.
HP, meanwhile, said it will incur $1 billion in restructuring costs related to the company’s decision to stop making tablets and phones based on the webOS software acquired when HP bought Palm last year. That’s likely to include severance for many of the roughly 900 Palm workers who joined HP, although a spokesman said HP has not determined how many jobs will be affected.
At least on paper, divesting the PC business would raise HP’s overall profit margin: the PC division had operating profit of 6 percent last quarter, while every other division reported operating margins in the low to high teens.
But the PC business also boosts other segments of the company. HP’s printer and data center divisions benefit from “bundled” contracts with corporate customers who buy an assortment of tech products, including PCs, and from volume discounts that HP negotiates with its suppliers for those products.
Each of HP’s remaining businesses also has its own challenges. Apotheker has lowered the company’s annual earnings forecast in each of the last three quarters.
As with the PC sector, profit margins are shrinking in the server business, which is increasingly dominated by lower-cost, commodity machines. Growth in the printing business has slowed; experts say the popularity of digital media means consumers and businesses will print even less in the future.
Printing has been a major profit center for HP, largely because of high mark-ups on printer ink. Apotheker said HP has no plans to dump the printing group, although some analysts argue the printing and PC businesses are so closely linked that they should go together.
In the services business, meanwhile, Apotheker has said HP needs to invest more to expand its expertise and capabilities. He named former IBM executive John Visentin to lead the division, following longtime executive Ann Livermore’s move to the HP board.
Experts say demand is slowing for the kinds of basic outsourcing operations that HP acquired when it bought Electronic Data Systems for nearly $14 billion in 2008. when it comes to more profitable contracts to help corporations use technology to revamp their business, Sayers said HP lags behind IBM and Accenture.
And despite several recent acquisitions, HP’s software division is still its smallest business, with $780 million in revenue last quarter. That’s up 20 percent from a year ago, and Apotheker has said the $10 billion purchase of British software-maker Autonomy will drive more growth.
But it’s not an easy task to assemble software from different companies into a coherent set of products. both Oracle and IBM have more experience there. Ventana Research analyst mark Smith said HP has struggled to meet goals for another software acquisition, Vertica, after canceling an earlier program aimed at a related market.
“If they’re going to compete with IBM, Oracle and SAP, they’re going to have to do more acquisitions, they’ve got to streamline their software portfolio and they’re going to have to gain more trust and credibility with customers,” Smith said.
Contact Brandon Bailey at 408-920-5022; follow him at Twitter.com/BrandonBailey