Nine months back, B&E had questioned whether Leo Apotheker was the right choice to fill Hurd’s shoes at HP (article titled, “Wrong person. Wrong place?”). With his recent announcement to restructure HP’s healthy business, the questions are back. Will his bet pay off; or is it a fatal move for HP?
Many debate that a move away from hardware will help HP’s operating margin (OM). True. But only in percentage terms. If we consider total revenue synergy of $320 million due to the acquisition, HP’s OM will improve from the currently estimated 10.5% to 13.1% in FY2012. But this would be missing the woods for the trees. Besides losing the crown of being the #1 revenue-generating IT company in the world (to IBM), its operating profits will show a decline of $1.46 billion (to $11.68 billion, given the decline in revenue base due to the PSG unit sell-off). What HP is trying at the moment is to become IBM, whose OM stands at a high 20.02%. But given the current economic scenario, when a diversified model is considered the need of the hour given the macroeconomic uncertainties, HP is doing wrong by putting its profitable hardware unit for sale and moving solely to services. Says NY-based Goldman Sachs Analyst Christina Colon to B&E, “The separation of the PSG division from HP comes with risks. For years, HP has argued that the PC business was tightly intertwined with its enterprise hardware distribution and supply chains. Furthermore, the supply-side scale provided by the division was a critical competitive advantage. Therefore, a spin-off and sell-out may bring some operational challenges that may not be immediately obvious.” Truth is: at present, HP’s OM is more than double of the industry (diversified computer systems business model) standard, which stands at a 5.12% (source: Capital IQ). HP’s present business model is therefore strong.
What is most surprising about the consumer business spin-off is that it happens at a time when HP’s Enterprise businesses are not having a smooth run. As Vlad Rom, Analyst at Credit Suisse, while talking to B&E from Manhattan, says, “The most pressing concerns, are that of Services margins taking another step down, and the enterprise business being affected by a deteriorating macro outlook. We are lowering EPS estimates for FY2011 & FY2012 by 1.6% & 11.4% to $4.83 & $4.56 respectively. It appears that the transformation in Services will take some time with margins declining further in the near term and market trends remaining lackluster.” At present, HP is being hit by a range of secular issues facing the business compounded by chances of a macroeconomic downturn. The overall results and near-term outlook from both Goldman and S&P have confirmed the rapid slowing in the Services & Enterprise Server, Storage and Networking (ESSN) units that account for 95.34% of its Enterprise revenues.
In the Services business which contributes to 34% of the group’s operating income, revenue grew only 4% y-o-y and OM declined by 2.1% during H1, 2011. While the company has appointed a new head of Services (John Visentin, previously head of HP Enterprise Services and GM of IBM Integrated Technology Services), experts opine that the deterioration in Services will continue, with the turnaround taking a further 4-6 quarters. HP’s ESSN business, that contributes to 25% of its income, faced both macro and structural headwinds in the first half of 2011, as OM remained flat y-o-y at a low 7%. Given the slower economic environment and weakness in the Public vertical (which accounts for 10% of revenues), and budget constraints in US and Europe (which are likely to continue until 2013-14), the outlook for ESSN sub-segments is not all about smiles. Even the high-promise-cloud-computing power-generating servers unit faces increasing headwinds from the adoption of virtualisation, a bifurcating x86 server market and a fading server refresh cycle. Worse, the key high-end x86 segment, in which HP has more significant share, is forecasted to decline at a CAGR of 3.4% (as per Credit Suisse). There is further bad news with industry watchers forecasting a slower growth trajectory despite pricing advantages over key competitors for HP’s networking and Imaging & Printing (IPG) businesses. Giving a quick prediction, Stephen Oshman, Analyst at Goldman Sachs, while speaking to B&E from NYC, says, “It appears that we underestimated the challenges HP is facing. Despite forecasts below guidance and consensus, it seems, HP faces more obstacles than even we expected. Given the numerous issues, both short term like continued supply chain disruptions and currency headwinds for IPG and long term like potential PSG divestiture, enterprise transformation, we lower our revenue and EPS forecast for FY2012 and FY2013.” There it is – trouble in all the units that Apotheker’s is betting his money on.
What is most surprising about the consumer business spin-off is that it happens at a time when HP’s Enterprise businesses are not having a smooth run. As Vlad Rom, Analyst at Credit Suisse, while talking to B&E from Manhattan, says, “The most pressing concerns, are that of Services margins taking another step down, and the enterprise business being affected by a deteriorating macro outlook. We are lowering EPS estimates for FY2011 & FY2012 by 1.6% & 11.4% to $4.83 & $4.56 respectively. It appears that the transformation in Services will take some time with margins declining further in the near term and market trends remaining lackluster.” At present, HP is being hit by a range of secular issues facing the business compounded by chances of a macroeconomic downturn. The overall results and near-term outlook from both Goldman and S&P have confirmed the rapid slowing in the Services & Enterprise Server, Storage and Networking (ESSN) units that account for 95.34% of its Enterprise revenues.
In the Services business which contributes to 34% of the group’s operating income, revenue grew only 4% y-o-y and OM declined by 2.1% during H1, 2011. While the company has appointed a new head of Services (John Visentin, previously head of HP Enterprise Services and GM of IBM Integrated Technology Services), experts opine that the deterioration in Services will continue, with the turnaround taking a further 4-6 quarters. HP’s ESSN business, that contributes to 25% of its income, faced both macro and structural headwinds in the first half of 2011, as OM remained flat y-o-y at a low 7%. Given the slower economic environment and weakness in the Public vertical (which accounts for 10% of revenues), and budget constraints in US and Europe (which are likely to continue until 2013-14), the outlook for ESSN sub-segments is not all about smiles. Even the high-promise-cloud-computing power-generating servers unit faces increasing headwinds from the adoption of virtualisation, a bifurcating x86 server market and a fading server refresh cycle. Worse, the key high-end x86 segment, in which HP has more significant share, is forecasted to decline at a CAGR of 3.4% (as per Credit Suisse). There is further bad news with industry watchers forecasting a slower growth trajectory despite pricing advantages over key competitors for HP’s networking and Imaging & Printing (IPG) businesses. Giving a quick prediction, Stephen Oshman, Analyst at Goldman Sachs, while speaking to B&E from NYC, says, “It appears that we underestimated the challenges HP is facing. Despite forecasts below guidance and consensus, it seems, HP faces more obstacles than even we expected. Given the numerous issues, both short term like continued supply chain disruptions and currency headwinds for IPG and long term like potential PSG divestiture, enterprise transformation, we lower our revenue and EPS forecast for FY2012 and FY2013.” There it is – trouble in all the units that Apotheker’s is betting his money on.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
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Arindam Chaudhuri: We need Hazare's leadership
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
