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TwitterApotheker or Whitman … HP’s challenge remains the same
Posted by Marc Brien, VP Research, Domicity Ltd.
(For an expanded analysis of the issues discussed here, download Domicity’s free 21-page e.Paper. Login or email is not required. This post is based on research for an upcoming Domicity CORProfile© providing an in-depth analysis of the strategies and operations of a global cloud leader. To receive advance notice of this report, please click here.)
Boosting gross margins
An earlier post discussed how Hewlett-Packard needs to generate fatter gross margins to fund the spending required to grab the advantage in cloud computing. Under previous CEO Mark Hurd’s direction, HP boosted earnings by under-investing in core areas — notably wages, R&D, sales and marketing. Domicity believes this approach was unsustainable.
After several poor quarters, Hurd’s replacement Léo Apotheker moved to speed up the transition to a higher-margin business model by spinning out HP’s low-margin Personal Systems Group (PCs and other client devices). This caused such an uproar among HP’s customers, suppliers, channel partners, and investors that the Board dumped Apotheker.
Replacement CEO Meg Whitman reversed course, deciding to keep the PC business. But retaining the $41-billion a year Personal Systems Group returns things to square one. Whitman must still define a new path towards fatter gross margins to fund the necessary cloud-enabling investments.
It is worth reprising the table from the earlier post (shown below), with its 30-year proportional analysis of HP’s income statement. This analysis illustrates just how undernourished the company’s cost structure has become over the years. Note how R&D and SG&A (Selling, General & Administrative) expenses were reduced to the bare bones to enable thin gross margins driven by a commodity pricing strategy.
Click on image for a larger PDF version
Over the long run, HP will not be able to compete effectively for cloud opportunities if spending on R&D and SG&A remains a fraction of the spending by competitors like Apple, IBM, Cisco, and Oracle. Increases in gross margins must be found to finance increased spending in these areas.
Efforts to wring strong and profitable growth out of the PC and printer businesses will continue, but will require patience. Domicity believes that the lion’s share of HP’s focus over the medium term will be on boosting its market presence in server-side businesses including enterprise servers, storage, networking, software, and professional services.
In 2011, HP invested more than $10-billion in acquisitions on Autonomy and Vertica to establish a strong data analytics business. This is just a down payment on what the company will need to spend to close the gap on server-side market leader IBM.
Once the company’s balance sheet has been restored from the Autonomy purchase, we have already speculated that HP may find Accenture an irresistible acquisition target. Also look for HP to make acquisitions to build up its cloud hosting business, including as-a-service software offerings.
Domicity’s free downloadable e.Paper tackles these issues in greater detail.
[...] Apotheker or Whitman … HP’s challenge remains the same [...]
[...] HP’s business model is transitioning from previous CEO Mark Hurd’s strategy of wringing maximum operating margin from minimal gross margins. The new emphasis is on using engineering expertise to generate fatter gross margins which will fund higher operating margins, more generous wages, and more investment in R&D, sales, and marketing. Link here for more on HP’s business model. [...]