HP chose the occasion of its Q3 earnings call to drop the bomb. The company that under Mark Hurdâ€™s watch focused on Converged Infrastructure, spending almost $7 billion to buy Palm, 3COM, and 3PAR, is now pulling a 180 in ditching both the PC and Palm hardware business, and making an offer to buy Autonomy, one of the last major independent enterprise content management players, for roughly $11 billion.
At first glance, the deal makes perfect sense, given Leo Apothekerâ€™s enterprise software orientation. From that standpoint, Apotheker has made some shrewd moves, putting aging enterprise data warehouse brand Neoview out of its misery, following up weeks later with the acquisition of Advanced SQL analytics platform provider Vertica. During the Q3 earnings call, Apotheker stated the obvious as to his comfort factor with Autonomy: â€œI have spent my entire professional life in software and it is a world that I know well. Autonomy is very complementary.â€
There is potential synergy between Autonomy and Vertica, with Autonomy CEO Mike Lynch (who will stay on as head of the unit, reporting to Apotheker) that Autonomyâ€™s user screens provide the long missing front end to Vertica, and that both would be bound by a common â€œinformation layer.â€ Of course, the acquisition not being final, he did not give details on what that layer is, but for now weâ€™d assume that integration will be at presentation and reporting layer. There is clearly a lot more potential here — Vertica for now only holds structured data while Autonomy’s IDOL system holds everything else. In the long run we’d love to see federated metadata and also an extension of Vertica to handle unstructured data, just as Advanced SQL rivals like Teradata’s Aster Data already do.
Autonomy, according to my Ovum colleague Mike Davis who has tracked the company for years, is one of only three ECM providers that have mastered the universal document viewer â€“ Oracleâ€™s Stellent and an Australian open source player being the others. In contrast to HP (more about that in a moment), Autonomy is quite healthy with the latest quarterly revenues up 16% year over year, operating margins in the mid 40% range, and a run rate that will take the company to its first billion dollar year.
Autonomy is clearly a gem, but HP paid dearly for it. During Q&A on the earnings call, a Wall street analyst took matters back down to earth, asking whether HP got such a good deal, given that it was paying roughly 15% of its market cap for a company that will only add about 1% to its revenues.
Great, expensive acquisition aside, HPâ€™s not doing so well these days. Excluding a few bright spots, such as its Fortify security software business, most of HPâ€™s units are running behind last year. Q3 net revenue of $31.2 billion was up only 1% over last year, but down 2% when adjusted for constant currency. By contrast, IBMâ€™s most recent results were up 12% and 5%, respectively, when currency adjusted. Dennis Howlett tweeted that it was now HPâ€™s turn to undergo IBM’s near-death experience.
More specifically, HP Software was the bright spot with 20% growth year over year and 19.4% operating margin. By contrast, the printer and ink business â€“ long HPâ€™s cash cow â€“ dropped 1% year over year with the economy dampening demand from the commercial side, not to mention supply chain disruptions from the Japanese tsunami.
By contrast, services grew only 4%, and is about to kick in yet another round of transformation. John Visenten, who ran HPâ€™s Enterprise services in the Americas region, comes in to succeed Ann Livermore. The problem is, as Ovum colleague John Madden states it, HPâ€™s services â€œhas been in a constant state of transformationâ€ that is making some customersâ€™ patience wear thin. Ever since acquiring EDS, HP has been trying â€“ and trying â€“ to raise the legacy outsourcing business higher up the value chain, with its sights literally set in the cloud.
The trick is that as HP tries aiming higher up the software and services food chain, it deals with a market that has longer sales cycles and long-term customer relationships that prize stability. Admittedly, when Apotheker was named CEO last fall, along with enterprise software veteran ray Lane to the board, the conventional wisdom was that HP would train its focus on enterprise software. So to that extent, HPâ€™s strategy over the past 9 months has been almost consistent â€“ save for earlier pronouncements on the strategic role of the tablet and WebOS business inherited with Palm.
But HP has been around for much longer than 9 months, and its latest shifts in strategy must be viewed with a longer perspective. Traditionally an engineering company, HP grew into a motley assortment of businesses. Before spinning off its geeky Agilent unit in 1999, HP consisted of test instruments, midrange servers and PCs, a token software business, and lest we forget, that printer business. Since then:
â€¢ The 2001 acquisition of Compaq that cost a cool $25 billion, under Carly Fiorina’s watch. That pitted it against Dell and caused HP to assume an even more schizoid personality as consumer and enterprise brand.
â€¢ Under Mark Hurdâ€™s reign, software might have grown a bit (they did purchase Mercury after unwittingly not killing off their OpenView business), but the focus was directed at infrastructure â€“ storage, switches, and mobile devices as part of the Converged Infrastructure initiative.
â€¢ In the interim, HP swallowed EDS, succeeding at what it failed to do with its earlier ill-fated pitch for PwC.
Then (1) Hurd gets tossed out and (2) almost immediately lands at Oracle; (3) Oracle pulls support for HP Itanium servers, (4) HP sues Oracle, and (5) its Itanium business sinks through the floor.
That sets the scene for today’s announcements that HP is â€œevaluating a range of optionsâ€ (code speak for likely divestment) for its PC and tablet business â€“ although it will keep WebOS on life support as its last gasp in the mobile arena. A real long shot: HPâ€™s only hope for WebOS might be Android OEMs not exactly tickled pink about Googleâ€™s going into the handset business by buying Motorolaâ€™s mobile unit.
There is logical rationale for dropping those businesses â€“ PCs have always been a low margin business in both sales and service, in spite of what it claimed to be an extremely efficient supply chain. Although a third of its business, PCs were only 13% of HPâ€™s profits, and have been declining in revenue for several years. PCs were big enough to provide a distraction and low enough margin to become a drain. And with Palm, HP gained an eloquent OS, but with a damaged brand that was too late to become the iOS alternative â€“ Google had a 5-year headstart. Another one bites the dust.
Logical moves, but itâ€™s fair to ask, what is an HP? Given HPâ€™s twists, turns, and about-faces, a difficult one to answer. OK, HP is shedding its consumer businesses â€“ except printers and ink because in normal times they are too lucrative â€“ but HP still has all this infrastructure business. It hopes to rationalize all this in becoming a provider of cloud infrastructure and related services, with a focus on information management solutions.
As mentioned above, enterprises crave stability, yet HPâ€™s track record over the past decade has been anything but. To be an enterprise provider, technology providers must demonstrate that they have a consistent strategy and staying power because enterprise clients don’t want to be left with orphaned technologies. To its credit, todayâ€™s announcements show the fruition of Apothekerâ€™s enterprise software-focused strategy. But HPâ€™s enterprise software customers and prospects need the assurance that HP won’t pull another about face when it comes time for Apothekerâ€™s successor.
Postscript: Of course we all know how this one ended up. One good 180 deserved another. Exit Apotheker stage left. Enter Meg Whitman stage right. Reality has been reversed.