HP said Thursday that it will discontinue its WebOS operations as the company cut its outlook for the next two quarters. The company will also acquire Autonomy, an enterprise information retrieval outfit.
HP said that it will take a hit to fiscal 2011 earnings of $1.16 a share to $1.23 a share as it restructures and shuts down WebOS devices and related operations. There were signs that TouchPad sales were bleak, but a complete shutdown of WebOS operations was unexpected.
HP's statement held a bevy of items for customers and shareholders to ponder. First, HP's customers---and anyone that bought a TouchPad---wonder what the potential sale or discontinuation of the unit will mean. Shareholders have to consider the spin-off of the PC unit as well as a lower-than-expected outlook for the rest of the year. On a conference call with analysts, HP CEO Leo Apotheker said:
Transformation can involve difficult decisions, but we take these steps to better position for the future. These challenges and the transformation we are undertaking will take several quarters to fully resolve. I don't take this action lightly. I know our investors don't like being in this position and neither do I. I feel that as CEO I believe in transparency about what we are facing and be clear under the size of things we are doing now about it. To conclude, I'm taking ownership for these decisions and investments with a focus on driving actions that deliver value for shareholders as we shape the new HP.
HP said that its third quarter revenue will be $31.2 billion with earnings of 93 cents a share. Non-GAAP earnings will be $1.10 a share. Wall Street was looking for earnings of $1.09 a share on revenue of $31.17 billion.
Overall, the third quarter results were the least of HP's worries. The company said its fourth quarter revenue will be $32.1 billion to $32.5 billion. Non-GAAP earnings will be $1.12 a share to $1.16 a share. Wall Street was looking for $1.31 a share on revenue of $33.99 billion.
The guidance indicates that HP is seeing material weakness and having a tougher time navigating economic uncertainty relative to rivals like Dell. HP also confirmed that it is in talks to buy Autonomy.
HP's move to shed the PC business as well as discontinue the TouchPad has its risks. For starters, HP will take a reputation hit for launching a TouchPad and then killing it.
In a statement, HP said it will seek "strategic alternatives for its Personal Systems Group (PSG), including a full or partial spinoff.
The real kicker is that HP is going to discontinue its WebOS phones. It will "continue to explore options to optimize the value of webOS software going forward."
There are two ways to look at HP's moves today. On one hand, HP is making bold moves before the PC and WebOS operations become an anchor for the company. On the other side, HP's business is struggling and it has disappointed Wall Street since the end of Mark Hurd's tenure.
Meanwhile, a bevy of IT insiders have questioned HP's Autonomy acquisition. HP said that it will acquire Autonomy for $42 a share in cash, or $10 billion.
Apotheker said that the acquisition of Autonomy represents a shift int higher margin businesses. HP is now positioning itself as an information management company. Apotheker took heat from analysts over the Autonomy price tag. Apotheker said:
Autonomy represents an opportunity for HP for us to accelerate our vision to decisively and profitably lead a larger win space which is the enterprise information management space.
Add it up and HP is aiming to exit the consumer business---or at least quarantine those operations---to focus on the more lucrative software, systems and services business. If HP is successful, it will look more like IBM when finished. The problem for HP is that IBM is firing on all cylinders. The consumer unit---whether it's shed, sold or spun off---will be left to battle Apple.
HP shares took a hit through regular and extended hours trading.
HP said its fiscal 2011 revenue will be in the $127.2 billion to $127.6 billion range. That's down from previous sales range of $129 billion to $130 billion. Non-GAAP earnings will be $4.82 a share to $4.86 a share. That range is down from at least $5 a share. GAAP earnings for fiscal 2011 will be $3.59 to $3.70 a share.
Wall Street was looking for fiscal 2011 earnings of $5.01 a share on revenue of $129.1 billion.
Those non-GAAP earnings exclude charges related to exiting the WebOS operations.
Business unit results
HP's business group results highlight the strain of the consumer business. HP's services revenue was up 4 percent and enterprise server, storage and networking unit saw sales gains of 7 percent for the quarter. Meanwhile, software revenue jumped 20 percent from a year ago.
However, HP's personal systems group had a revenue decline of 1 percent and imaging and printing also fell at the same clip.
Based on the business unit results, HP's PC unit held up well and delivered $567 million in operating income.
As HP goes through this transition, it will face a fear, uncertainty and doubt war with its rivals. HP is fighting a multifront war. On the enterprise side, Cisco, IBM, Dell and Oracle are chief rivals. On the consumer side, HP faces Apple and Google's Android army.
Michael Dell, CEO of Dell, kicked off the festivities quickly.
Competitors are likely to take aim at HP on multiple fronts and portray the company as distracted. Look for IBM and Dell to target HP's server position. Cisco will look for retribution after quarters of HP targeting the networking giant's core switch products. On the corporate PC side of the equation, Lenovo and Dell will aim for a bigger chunk of the upgrade cycle.
On the consumer side, the reputation hit to HP can't be underestimated. HP will have to smooth over relationships with retail partners, resellers and consumers who may have taken the TouchPad plunge. On the software side, HP's hasty retreat on WebOS will be remembered by developers. These developers are likely to be skeptical about HP's commitment to other efforts such as the public cloud.
Bottom line: Consumers and corporations will have doubts about HP and its intentions amid a potential spin off of the PC business.
Going forward, HP will have to face multiple questions. Among the larger questions:
How much time will CEO Leo Apotheker really have to pull off his Lou Gerstner imitation? Gerstner ditched IBM's low margin businesses and remade the company, but that process took nearly a decade.
What market share hit will HP see in PCs?
Will concerns about distractions bleed over into HP's core enterprise business?