HP Q3 numbers no joke, TouchPad ads aside
August 19, 2011
HP made computing history yesterday. And only part of the legend concerns the brilliant-comet flameout of the company's killer -- and now dead -- HP TouchPad. The rest of the company report on its third quarter was tragic as well.
One possible headline out of the numbers HP reported yesterday: Hewlett-Packard Reports Higher Q3 Earnings. The Associated Press actually used that one, along with "Details on HP's businesses: drop, keep, sell?" There's a question mark on that second one because, unlike the swift sword dropped on the TouchPad and Palm line, HP hasn't decided on whether it will cut loose its PC business, PSG.
"Why not just spin off PSG right now?" asked analyst Shannon Cross at the quarterly briefing yesterday. "Why leave it with the overhang of some other potential strategic move? Since you're getting rid of WebOS, how do we consider that you were going to push WebOS further into your PCs?" HP's answers from its CEO Leo Apotheker started with the fact that WebOS is not dead yet. Moving into a Ralph Kramden "hummina, hummina" tone, the CEO said
We've decided to look at all of the strategic options around PSG. All of them. The announcement of today will allow us to look at it more closely, including all the synergies and aspects of that operation. Over time a decision will arise about the appropriate way for PSG to go forward.
The gallows humor of translation jokes -- "We need to find the talent inside PSG and offer it a chance to stay before we announce a sale" -- isn't the worst of a black Friday for the darkened HP futures. The company fell back to calling itself an enterprise computing firm yesterday, at the same time SFO Cathie Lesjak delivered "the most difficult outlook I've had to give" during a tenure that's lasted more than four years. The markets reacted by selling HP down by almost 20 percent over one day.(below). That won't help the Dow.
HP's other businesses are showing scant growth now, and the most enterprise-like of its efforts, the Enterprise Server, Storage & Networking unit, must carry the dead weight of Business Criticial Systems around its neck. PSG, the largest chunk of HP revenues and the only group to show any increase in operating profits, is now being examined like a weak movie from TouchPad spokesman Russell Brand. Does HP now take PSG straight to DVD? It outsold HP Services as well as servers, but posted the smallest operating profit share of any HP group. Meanwhile, sales of Business Critical Systems running 3000 migration target HP-UX have dropped 9 percent. The stock lost 10 percent of its price overnight on the report's numbers, and another 6 percent on news of the historic short lifespan of the TouchPad. WebOS looks like it's on life support.
Apotheker splashed a bit of sunshine on the enterprise business quickly, saying that the ESSN unit had "good performance overall." The Intel-based blade servers and the storage products pulled their weight to counter the negative drag of Oracle. What? Yes, HP called out a specific competitor. Lesjak used the company where former CEO Mark Hurd scuttled off to, by way of explaining why there are no new-customer Integrity-Itanium sales these days.
This decline is sharper than expected. Our ability to close deals has been impacted by Oracle's Itanium decisions, and orders are being delayed or canceled. We are working diligently to enforce the commitments that Oracle has made to our customers and to HP.
"Them's fighting woids," as the Three Stooges would say, but it's no surprise while HP flogs a lawsuit to force Oracle to support Integrity, Itanium and yes, HP-UX. It's just that we've never heard HP explain any of it's business is sharply down because a competitor is killing off HP orders.
Any bright spots on the report? Collectively the company earned more money than Q3 of 2010. Making a profit arrives in a number of ways. The PC business increased its profits serendipitously, because parts were cheaper to purchase, for example. HP gave no details on recovering the cost of its TouchPad parts now they're not needed.
The seven-week meltdown of TouchPads -- cold sellers "which are not meeting our expectations" -- prompts some crowing from the Android OS crowd and hard cheese about WebOS, the operating system that held promise for HP's dreams about in-house software. Alan Yeo of ScreenJet said
Now I wonder if it possible to remove webOS and install Android? might make it worthwhile for someone buying HP's 250,000 surplus TouchPad stock, and start shipping a sub-$200 Android tablet.
Sure they can do it. Such a mashup would give the world a tablet that looks just like an iPad and priced below $200 -- with all the lifespan of a comic-attempt TouchPad commercial. Nobody's laughing at HP's PC group this morning.
Thanks to the glory of Google, whose Android is becoming the last hope of an iPad alternative, those HP commercials live on, stashed away on YouTube until HP yanks the ads, too. All Things Digital -- the Wall Street Journal's tech site spinoff -- has a complete roundup of the TouchPad's ads. (We hear they all play real smooth on a TouchPad. Watch 'em while they're hot, and the tablet is not so hot.)
WebOS was supposed to be a triumph of software -- HP execs said yesterday that "the software was met by strong reviews." However, "the sell-through was not what we expected." In the end for WebOS, for all of the braying about multi-tasking being its strongest suit, it turns out that Palm Pre and TouchPad prospects didn't even want to do one thing at a time: buy the devices.
You might remember a time when an HP Touchscreen PC TV ad (complete with butterfly) was as rare as a TouchPad bulk order from IT. Sad, indeed when your computer gets lifespan can't match the paper-thin artistry of Glee. Its star Lea Michele might be delighted her face was hidden behind the tablet in 85 percent of her TouchPad commercial.
Like convincing us that 24-year-old actors are still high-schoolers, or comedy with a blistering English delivery, making a splash with software is hard. HP did it once, without TV in an era when its admitted "velocity of change" in the computer space didn't accelerate. There was time for the 3000 to recover and improve, so its golden saddle of MPE could carry business, and IMAGE could get employed as a database selling point. Oracle was once so uncertain about beating IMAGE it wouldn't release an MPE Oracle.
Now HP is pointing at a $10 billion acquisition of Autonomy, a UK software company it admires because it's "one of the few license-based software companies delivering Software as a Service" through the cloud. Autonomy made $850 million in sales last year, so HP is buying it at close to 11x trailing revenue. That admiration sparked a "we're back at the enterprise business" answer when one analyst called $10 billion a price built from fantasy. "That's at a time when your stock is at an all-time low in every single valuation metric, currently trading at about six times earnings," said Tony Sacconaghi of Sanford Bernstein.
Automony earns less than one percent of your revenues and it's going to cost you 15 percent of your market cap. Comment on the price paid and the rationale.
"Autonomy represents an opportunity for us to accelerate our vision," Apotheker answered, "to decisively and profitably lead a large and great space -- the enterprise information management space. It also brings us higher-value solutions that help customers meet the explosion of information." Lots of HP storage sales might come from the Autonomy purchase. That would be another flotation device for the enterprise group which includes Integrity.
There's little evidence that WebOS is going to make it to the third party or licensing markets that HP dreams about after a nightmare six weeks of tablet sales. So much for the power of true Flash videos, or a better way to push mobile notifications. The best news from yesterday's report is that HP seems to want to sink or swim on enterprise business computing now -- an outlook that might extend the lifespan of another HP OS, HP-UX.