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Hewlett-Packard (NYSE: HPQ ) had quite an eventful day yesterday. Where do we start?
Let's start with the cold, hard numbers. The computer maker announced third-quarter revenue of $31.2 billion, an increase of 1.6% from last year's $30.7 billion. This yielded non-GAAP earnings per share of $1.10. These results were mostly in line with consensus estimates, so there weren't any real shockers there to speak of. HP also lowered its full-year revenue forecast from a previous range of $129 billion to $130 billion down to between $127.2 billion and $127.6 billion.
Beyond the numbers lies the real story.
HP to Palm: "Do we need a receipt to return your entire company?"
In a bold move reminiscent of Cisco Systems' (Nasdaq: CSCO ) killing of its Flip camera line, HP is discontinuing operations for webOS devices like the underwhelming TouchPad and webOS phones. Unfortunately for HP, it spent about $1.2 billion buying Palm, compared with the $590 million that Cisco spent on Flip.
The TouchPad was launched less than two months ago, only to see discounts and permanent price cuts in response to nonexistent demand in the face of Apple's (Nasdaq: AAPL ) iPad. As silly as it may sound in hindsight, HP actually envisioned a future with webOS as the clear No. 2 tablet platform. Maybe the company didn't get the memo that Google's (Nasdaq: GOOG ) Android is pretty popular, not to mention Microsoft's (Nasdaq: MSFT ) inevitable Windows Tablet.
The TouchPad and webOS phones failed to meet the company's internal financial targets and milestones. HP was going to need to dump more money into webOS over the next few years just for a chance of making it a success, with the company acutely aware of its "young ecosystem and poorly received hardware." HP says it will continue to explore options to optimize the value of webOS software going forward, which in non-PR talk translates into trying to sell or license the OS. After all, webOS might turn out to be a pretty good software platform … for printers.
It takes guts to make this big of a cut so soon. I'll give HP CEO Leo Apotheker credit for making the tough call. Plunging more dollars into an uphill battle against iOS and Android would only prolong the pain for shareholders. Better late than never.
The HP of the future
After initially confirming that the company was in discussions with British software company Autonomy about a possible offer, HP subsequently announced that both boards have unanimously approved a $42.11-per-share cash offer, more than a 60% premium. The board believes that the acquisition will be accretive to non-GAAP earnings in its first full year upon completion.
This comes as HP explores plans to divest its PC business over the next 12 to 18 months and focus on higher-margin value-added services and cloud offerings. The low-margin PC division was responsible for 30% of the quarter's revenue while contributing to only 17% of the quarter's earnings from operations. Compare this with the more profitable Services segment, which furnished 29% of revenue and 37% of earnings from operations.
This is exactly what IBM (NYSE: IBM ) did years ago, selling its PC operations to Chinese PC vendor Lenovo. Apotheker described the announcements as "transforming HP for the future." Investors shouldn't be too surprised at the company's new direction. After all, what would you expect after hiring the ex-CEO of software company SAP? Shareholders are expressing their skepticism as the stock has hit multiyear lows on the news.
This might be because Autonomy's revenue is minuscule compared with HP's. Autonomy's second-quarter revenue was $256 million, which pales in comparison with HP's aforementioned $31.2 billion. Yet the acquisition's price tag comes in at roughly $10 billion, which is more than 15% of HP's $61 billion market cap as of yesterday's close. After today's brutal sell-off, the Autonomy price tag is now 20% of HP's value.
Only time will tell
The transition will move the company out of direct competition with Apple and further into the realm of other enterprise business software companies like Oracle (Nasdaq: ORCL ) , IBM, and Cisco. HP is no stranger to fighting with Oracle, but now the bouts will be moved out of the courts and headlines.
These announcements mark a pivotal point in HP's history, shifting the entire company's focus from hardware to software. It's probably best to get out of Apple's way, but in doing so the company will be going up against other very capable contenders. This radical change will prove to either be a leap in the right direction or a misguided detour. Only time will tell whether Apotheker's bold shift will pay off.