News

HP Considers Exiting PC Business in Earnings Call Bombshell

• By Jeffrey Schwartz
• 08/18/2011

A leader in the PC hardware market may be leaving that industry entirely.

Hewlett-Packard stunned the IT world on Thursday by saying it is considering the spinoff or sale of its PC division. The company also announced it is killing its WebOS-based hardware business, marking an exit from its short-lived tablet and smartphone arm.

During its earnings call, HP said it is exploring various options that would include a full or partial separation of its Personal Systems Group (PSG), either through a spinoff or a sale.

HP's PSG drew revenue of $41 billion last year. But compared to the rest of HP's businesses, PSG is fraught with tight margins and increasing competition from a growing number of manufacturers. For the third quarter, PSG reported revenue of $9.6 billion, down 3 percent from the prior year.

"The exploration of alternatives for PSG demonstrates our commitment to enhancing shareholder value and sharpening our strategic and financial focus," said Leo Apotheker, HP's president and CEO, in a statement. "We believe exploring alternatives for PSG could enhance its performance, allow it to more effectively compete and provide greater value for HP shareholders."

The idea of HP spinning off PSG has been circulating for many years. Apotheker's predecessor, Mark Hurd, opposed the idea of selling or spinning off PSG, arguing that HP should provide the complete technology stack to consumers and enterprises. IBM sold off its PC business to Lenovo in 2005, looking to get out of the low-margin business at the time.

Now the PC business is under greater pressure than ever, thanks to new form factors that include mobile phones and tablets, notably Apple's iPad. Apple said it shipped 9.25 million iPads in the last quarter.

"It makes sense that HP shareholders don't want its low-margin PC business dragging down its high-margin enterprise services business," said Forrester Research analyst Sarah Rotman Epps in a blog post. "As for HP's chances as a standalone PC manufacturer, it's tough to be a PC maker in a post-PC world. HP's competition is Apple on the high end, which has justified higher margins based on non-hardware offerings. On the other end, all of HP's competitors other than Dell are based in Asia and have very different manufacturing and labor economics. HP has been caught up in a race to the bottom as the PC market has commodified. Now it either needs to become comfortable with commodification, or build out the elements of an ecosystem to enable true competition with Apple."

HP said it will spend the next 12 to 18 months exploring options, and cautioned it could decide not to exit the business after all.

Shuttering WebOS
As for dropping the WebOS hardware division, HP said it is discontinuing its TouchPad and Pre phones. The company picked up the WebOS business with last year's $1.2 billion acquisition of Palm Inc.

"Our WebOS devices have not gained enough traction in the marketplace with consumers, and we see too long a ramp-up in the market share," Apotheker said on HP's earnings call Thursday evening. "Due to market dynamics, significant competition and a rapidly changing environment, continuing to execute our current device approach in this market space is no longer in the best interest of HP and HP's shareholders. Therefore, we have made the difficult but necessary decision to shut down the WebOS hardware operations."

HP said it is looking at alternatives for its webOS software business, but it remains to be seen whether it will be able to develop a successful ecosystem having abandoned the hardware business.

Achieving Autonomy
In another significant development, HP said it will acquire Autonomy Corp. plc., for $10.3 billion. Cambridge, England-based Autonomy is a leading supplier of search, archiving, records management and e-discovery software and cloud services.

Autonomy is best known for its Intelligent Data Operating Layer (IDOL) platform. "Autonomy today is one of the largest cloud players with over 30 petabytes of customer information under management via the cloud-based archiving and backup solutions. They have over 25,000 customers globally," Apotheker said. "Autonomy sees the information transformation and subsequent market opportunity exactly as we do."

HP said Autonomy will be run as a separate business to be managed by CEO and co-founder Mike Lynch.

Finally, HP lowered its guidance for the current fiscal year, saying revenue would be in the range of $127.2 billion to $127.6 billion, down from prior estimates of $129 billion to $130 billion.