HP needs to forget about Autonomy and recognise that it is a company failing on several fronts, not least the mobile market
HP chief executive Meg Whitman. The company's fourth-quarter figures make grim reading. Photograph: Chinafotopress/Getty Images
Although the noise from HP on Tuesday was about the accusations against unnamed former managers at Autonomy, the real concern should be that the company which Silicon Valley once looked to as the engine of invention is spluttering.
Ignore Autonomy; the figures that should really have HP's management and shareholders worried, from its fourth-quarter financial figures, begin with its PC division. "Revenue was down 14% year over year with a 3.5% operating margin. Commercial revenue decreased 13%, and consumer revenue declined 16%. Total units were down 12% with both desktops and notebooks units down 12%."
HP's PC business is the world's biggest, and its second-largest division (after services), bringing in revenues of $8.7bn in the past quarter. Yet HP is barely making any money on it – IDC estimates it shipped 13.94m computers, giving an average price of $620, on which it got total profits of $309m – just $22 per PC.
"I don't see how anyone could invest in this company any longer," ISI Group analyst Brian Marshall told Associated Press, describing it as "an unmitigated train wreck".
Contrast that with Apple and Samsung, presently the two soaraway successes in the ferociously competitive mobile and tablet market: Apple's average selling price per iPhone is about $630, and its per-phone gross margin about 50%, according to court filings. Similarly, Apple shifted 14m iPads in the third quarter – a figure many thought disappointing, even though it outnumbers HP's PC figure – at an average $535 each. Samsung's telecoms division, which produces phones and tablets, recorded $5.12bn in profit in the third quarter, shipping 97.9m phones in total (of which 56.3m were the more valuable smartphone, such as its Galaxy range) and about 2m tablets. The lesson is clear: mobile devices are where the money is.
It's also where the growth is. While the smartphone market is roaring ahead – growing 45% year-on-year – HP's 12% fall in PC shipments is substantially greater than the wider PC market: total shipments of Windows PCs worldwide fell by 9%. The dip is blamed on businesses and consumers waiting for the launch of Windows 8 (which came at the end of October), and the general economic climate in the US and Europe.
Yet HP very recently had if not a lead, then at least a position in both the smartphone and tablet market. In July 2010 it bought Palm, which had been a pioneer in the smartphone market but fallen on unprofitable times, for $1.2bn to "enhance HP's ability to participate more aggressively in the highly profitable, $100bn smartphone and connected mobile device markets". Early in 2011 it announced a forthcoming range of smartphones and even a tablet – the TouchPad.
But abruptly in August 2011, with the TouchPad having launched, it decided to kill off both tablet and smartphones (a fact it buried away in its announcement that it was "in discussions" to buy another company – Autonomy). HP took a $3.3bn writedown on the cost of the Palm acquisition and phone development. Meg Whitman, the chief executive, spoke vaguely about getting back into the smartphone market – but not before 2014.
HP has a similar problem to Dell, whose woeful results last week point to long-term weakness for companies that aren't in the mobile market. Coming the day after the announcement that Intel's chief executive Paul Otellini will retire from leading the company which makes the central processing chips for the world's PCs – but not phones or tablets – it looks as though something deep is changing in the technology world.
"These issues have been brewing for a while," says Neil Mawston, executive director of the research company Strategy Analytics. "HP and Dell have been struggling with the tablet market since 2010 [when Apple launched the iPad, triggering a huge shift in the business]. And this change has been picking up speed. But it hasn't come out of the blue."
The change is that people are buying tablets rather than PCs, and both Dell and HP have ignored the consumer market, says Mawston. Dell's consumer division made a loss in the last quarter.
And the gloom isn't over for HP. Remember its fabulously profitable printer inks, which cost more pro rate than champagne? "Printing revenue declined 5% year over year with a 17.5% operating margin," says the results. "Total hardware units were down 20% year over year. Commercial hardware units were down 15% year over year, and consumer hardware units were down 22% year over year." In other words, people aren't buying printers. Shipments of "large format" printers fell 5% in the third quarter, and HP's leading share was eroded there; more generally, we're printing fewer pages because the availability of smartphones and tablets means we don't have to carry paper around so much – something IDC noted as it recorded a fall in page printing in 2011 compared to 2010.
"HP's and Dell's problem is that they want to be IBM," Richard Windsor, a consultant and former equities analyst at Nomura, told the Guardian. "Twenty years ago IBM was where HP is today. They decided that hardware was becoming commoditised and moved into software and services. Now they have steady margins and a good share price and an extremely well-run company. But it was a long haul, and HP is just at the beginning of that."
Intel too is under threat, its fortunes tied to that of the PC business. Despite billions spent trying to build low-power chips, it has almost no presence in the smartphone business. Despite deals this year with Google-owned Motorola and China's Lenovo, it has less than 1% of the market, says Mawston, and despite its huge investment he doesn't see that growing beyond 8% by 2017. The rest belongs to chips using the low-power designs of ARM of Cambridge.
Allied to its $8bn writedown only in August against its acquisition of the services company EDS, it starts to look as though HP simply isn't good at buying things. Writing on his own site, Windsor was acerbic: "I view the mess surrounding Autonomy as the strongest signal yet that the board of HPQ is not fit for purpose." He thinks the question of whether HP's shareholders were "duped" is irrelevant; Meg Whitman, the current chief executive, was one of those who approved the purchase as a director: "The management and directors of HPQ do not have what it takes to turn this company around. [The company] needs vision, audacity and above all a new board of directors. Until there is a complete clearout, I think that this company will lumber from one quarter to the next and present no real vision about how it becomes a proper technology company again."
Ignore Autonomy; the figures that should really have HP's management and shareholders worried, from its fourth-quarter financial figures, begin with its PC division. "Revenue was down 14% year over year with a 3.5% operating margin. Commercial revenue decreased 13%, and consumer revenue declined 16%. Total units were down 12% with both desktops and notebooks units down 12%."
HP's PC business is the world's biggest, and its second-largest division (after services), bringing in revenues of $8.7bn in the past quarter. Yet HP is barely making any money on it – IDC estimates it shipped 13.94m computers, giving an average price of $620, on which it got total profits of $309m – just $22 per PC.
"I don't see how anyone could invest in this company any longer," ISI Group analyst Brian Marshall told Associated Press, describing it as "an unmitigated train wreck".
Contrast that with Apple and Samsung, presently the two soaraway successes in the ferociously competitive mobile and tablet market: Apple's average selling price per iPhone is about $630, and its per-phone gross margin about 50%, according to court filings. Similarly, Apple shifted 14m iPads in the third quarter – a figure many thought disappointing, even though it outnumbers HP's PC figure – at an average $535 each. Samsung's telecoms division, which produces phones and tablets, recorded $5.12bn in profit in the third quarter, shipping 97.9m phones in total (of which 56.3m were the more valuable smartphone, such as its Galaxy range) and about 2m tablets. The lesson is clear: mobile devices are where the money is.
It's also where the growth is. While the smartphone market is roaring ahead – growing 45% year-on-year – HP's 12% fall in PC shipments is substantially greater than the wider PC market: total shipments of Windows PCs worldwide fell by 9%. The dip is blamed on businesses and consumers waiting for the launch of Windows 8 (which came at the end of October), and the general economic climate in the US and Europe.
Yet HP very recently had if not a lead, then at least a position in both the smartphone and tablet market. In July 2010 it bought Palm, which had been a pioneer in the smartphone market but fallen on unprofitable times, for $1.2bn to "enhance HP's ability to participate more aggressively in the highly profitable, $100bn smartphone and connected mobile device markets". Early in 2011 it announced a forthcoming range of smartphones and even a tablet – the TouchPad.
But abruptly in August 2011, with the TouchPad having launched, it decided to kill off both tablet and smartphones (a fact it buried away in its announcement that it was "in discussions" to buy another company – Autonomy). HP took a $3.3bn writedown on the cost of the Palm acquisition and phone development. Meg Whitman, the chief executive, spoke vaguely about getting back into the smartphone market – but not before 2014.
HP has a similar problem to Dell, whose woeful results last week point to long-term weakness for companies that aren't in the mobile market. Coming the day after the announcement that Intel's chief executive Paul Otellini will retire from leading the company which makes the central processing chips for the world's PCs – but not phones or tablets – it looks as though something deep is changing in the technology world.
"These issues have been brewing for a while," says Neil Mawston, executive director of the research company Strategy Analytics. "HP and Dell have been struggling with the tablet market since 2010 [when Apple launched the iPad, triggering a huge shift in the business]. And this change has been picking up speed. But it hasn't come out of the blue."
The change is that people are buying tablets rather than PCs, and both Dell and HP have ignored the consumer market, says Mawston. Dell's consumer division made a loss in the last quarter.
And the gloom isn't over for HP. Remember its fabulously profitable printer inks, which cost more pro rate than champagne? "Printing revenue declined 5% year over year with a 17.5% operating margin," says the results. "Total hardware units were down 20% year over year. Commercial hardware units were down 15% year over year, and consumer hardware units were down 22% year over year." In other words, people aren't buying printers. Shipments of "large format" printers fell 5% in the third quarter, and HP's leading share was eroded there; more generally, we're printing fewer pages because the availability of smartphones and tablets means we don't have to carry paper around so much – something IDC noted as it recorded a fall in page printing in 2011 compared to 2010.
"HP's and Dell's problem is that they want to be IBM," Richard Windsor, a consultant and former equities analyst at Nomura, told the Guardian. "Twenty years ago IBM was where HP is today. They decided that hardware was becoming commoditised and moved into software and services. Now they have steady margins and a good share price and an extremely well-run company. But it was a long haul, and HP is just at the beginning of that."
Intel too is under threat, its fortunes tied to that of the PC business. Despite billions spent trying to build low-power chips, it has almost no presence in the smartphone business. Despite deals this year with Google-owned Motorola and China's Lenovo, it has less than 1% of the market, says Mawston, and despite its huge investment he doesn't see that growing beyond 8% by 2017. The rest belongs to chips using the low-power designs of ARM of Cambridge.
Allied to its $8bn writedown only in August against its acquisition of the services company EDS, it starts to look as though HP simply isn't good at buying things. Writing on his own site, Windsor was acerbic: "I view the mess surrounding Autonomy as the strongest signal yet that the board of HPQ is not fit for purpose." He thinks the question of whether HP's shareholders were "duped" is irrelevant; Meg Whitman, the current chief executive, was one of those who approved the purchase as a director: "The management and directors of HPQ do not have what it takes to turn this company around. [The company] needs vision, audacity and above all a new board of directors. Until there is a complete clearout, I think that this company will lumber from one quarter to the next and present no real vision about how it becomes a proper technology company again."
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