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The HP of the Future, Starting Yesterday

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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.

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Oracle, Microsoft, Google, Apple, IBM, and Cisco and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Google, Cisco, Microsoft, and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 20, 2011, at 11:10 AM, Midas5280 wrote:

    HP was once a great company. From the days of Carly Fiorina forward, though, the company has been in a death spriral. When you close out the founders' sons from board meetings, you show an arrogance beyond comprehension. Bill Hewlett and David Packard provided a living for millions of people through the years. Carly and Co. took only a few years to destroy the creation of these two genious men. Just as we're seeing in our government, we're seeing a lack of leadership that is tanking everything around us. I often wonder what it will take to wake the average American from his or her coma. Will the Chinese military knocking at your door be a wakeup call? Does the fact that the Chinese are buying up New York City seem alarming? What exactly will it take to wake the sheeple out of their stupified daze? How many longstanding companies will have to be destroyed? How many people will have to be unemployed? Just how bad is it going to get before the morons in this country stop thinking me-me-me and start getting their c-r-a-p together for we-we-we!

  • Report this Comment On August 20, 2011, at 11:24 AM, techy46 wrote:

    All forms of PCs will continue to become commodities with decreasing margins requiring high volume manufacturing at ver low costs (Asia). Microsoft proves software has the margins and moat to withstand competition. Apple's unique but isn't immune to competition from open OS, Android and Windows 8. HP's doing the right thing if it can get $5-10 billion from PSG. Google's giving Android away was a mistake. It's going to be real intrestinmg to watch 2012-13 mobile wars and enterprise software changes.

  • Report this Comment On August 20, 2011, at 2:48 PM, lucasmonger wrote:

    What a week. Google acquires MoMo (Motorola Mobility). HP throws in the towel not only on phones and tablets, but also the PC. Failing mobile phone developers are everywhere. Who's going to buyout (bailout) Nokia or RIM? On the PC side, will Dell, Toshiba, Acer, Sony still be in the PC business 3 to 5 years from now?

  • Report this Comment On August 20, 2011, at 6:11 PM, Stimulant wrote:

    Does anyone remember the merger with (acquisition of) Compaq, then the largest PC maker in the world?

    What a destruction of combined value.

    So Carly Fiorina got the boot.

    Wouldn't it have been much more reasonable to slice off the other acquisition of Palm and WebOS first, then see if something could be done about the PC business? Isn't it better to make one change at a time rather than make too many changes all at once?

    HP has a large niche in the printer-scanner business, but these devices require software too, especially for the all-in-one printers-scanners-copiers-fax machines, in the form of device-drivers and utilities. My impression from long use of such devices was that HP sucks at making good software. Will that trend change by an acquisition of a small software company and re-inventing the parent company?

    I also had bad experience with the power-supplies of HP-made scanners. I have lost 3 of those and haven't bothered to repair them.

    If HP had counted on higher sales due to short life of products, it must have made a bog mistake, since I am not going to buy one of these HP products anymore.

    On the other hand, I was planning to but an HP Laptop PC. Now that won't happen either.

    It seems to me that high revenues from a diversified line of (well made) products with margin-issues, beats the hell out of turning the company into a dwarf software maker with who knows how big (rather- small) revenues with high margins.

    Couldn't the company have stuck to some of its more traditional PC business and added some good software products on top of that, rather than trying a risky complete morphosis (caterpillar to a butterfly)?

    Is this a move from a former World #1 to an also-ran?

  • Report this Comment On August 21, 2011, at 12:22 PM, Nissh wrote:

    If wanted to go for Software business. Go all the way. Why just spinoff PSG. Should do it for Printer too.

    Doing this half-determination will not be successful. This is a great show case in Touch pad.

    Make yourself in a dead corner and you will find a new way.

    Good Luck HPQ.

  • Report this Comment On August 21, 2011, at 1:47 PM, srivatsan123 wrote:

    It seems intelligent men cannot think clearly when they reach the top (applies particularly to JC/Leo). It was pretty much conclusive the day they bought Palm and Flip that this money is running down the sink. Now HP is trying to convert itself to IBM by overpaying to buy a firm whose revenue is about 3% of PC division it is selling. Forgetting about revenues from software for now the problem with HP trying to become IBM is "lack of R&D", rewind back to 2004 when IBM decided to go fully into software services every aquisition was an accurate strike inline with their R&D focus and big blue spent maximum 400-500 million dollars on every one of these and has grown more nimble. If at all IBM can be won convincingly it can only be through good R&D and not bloated acquisitions.

  • Report this Comment On August 22, 2011, at 6:42 PM, longtimeHPfan wrote:

    As an HP fan for many years, starting with their first product an audio oscillator in 1954 and moving upward through the 34 hand-held calculator to their first desktop machines that morphed into powerful scientific computers based on their engineering BASIC, the best programming language I have ever used. But then came along Ms. Fiorina, who never seemed to understand electronics and HP's special skills in designing and making them like no one else. So she sinks the HP art by going PC (ugh! as a forward looking idea), when HP was doing great by deep-sixing Hewlett and Packard and the really good products disappeared except for printers. Now the CEO dumps the electronic arts altogether to go for business software as though that was a new bright area of business. I will keep my HP stock and see where it goes, but very sadly.

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