Thursday, May 23, 2013

A solid PRODUCTS assessment

Unanswered question after earnings: Will HP's bets pay off?

Jon Xavier, w Silicon Valley Business Journal has done some very nice assessments of HP recently.  Here's his take after the 2Q report:   (my comments in red)

Hewlett-Packard Co.'s earnings yesterday weren't great, but the stock price closed up more than 17 percent at $24.86 today. (this is one of the biggest upward moves in a long time!)
A deeper dive into the financials reveals the reason why: While revenue is slipping in basically every category besides printers, HP has slashed its expenditures, increased its cash flow, paid down debt, and has generally gotten its house in order. It's all part of CEO Meg Whitman's attempt to pull out of the nosedive HP has been in for the past few years.
It looks like Whitman and her team have done everything investors expect them to do, so if you believe in the turnaround narrative, yesterday's crappy-but-less-crappy-than-expected earnings report might give you hope that HP's salvation isn't a fiction.
But when will that salvation come? Even Whitman doesn't think the company will see a significant turnaround until 2014 at the earliest. Meanwhile, HP's revenue in traditional mainstays like PCs, servers and IT services continue to slide. Some analysts are saying that as much as 60 percent of HP's revenue might be in the middle of a secular decline.
If HP really wants to recover, it's going to need to at least stem the bleeding in down segments and create growth in new products and product categories. HP has several initiatives it's working on that could provide a way forward for the company. Here's what to watch if you want to know what will happen to HP:
HP talked a lot about Moonshot on its earnings call Wednesday, and with good reason. Moonshot represents the biggest innovation HP's server division has delivered in some time. It's a new server architecture which uses lots of small processors to deliver the same computing power with drastically reduced energy consumption. Given that electricity consumption is one of the biggest issues for most data centers, HP is hoping Moonshot will allow it to grab market share from its less energy efficient competitors.

Of course, Moonshot isn't quite as unprecedented as HP would have you think. If the idea behind it sounds familiar, that's because it's similar to the servers originally produced by a company called SeaMicro, which was subsequently purchased by AMD and which became AMD's server business. Facebook is also working on similar designs with its Open Compute Project. HP has a scale advantage, good channel partners, and it's moving into the space relatively early, but it's not going to be completely uncontested as it tries to take over the market for low-power servers.
The speed at which Moonshot is adopted could be a very important indicator for HP's future health and should be watched closely.  I concur fully
Software-defined networking
Software defined networking, the practice of using software and virtualization technologies to replace specialized networking hardware, is one of the fastest growing segments of the networking space these days. HP actually has some very strong offerings in this area, all of which are very complementary to Moonshot.  (it ts the combination of these two that is hardly the kind of thing AMD or Facebook would be expected to do; the question is IBM or Cisco or Oracle, not AMD, Intel, Facebook, or Sally's sodashop).
Android tablets
PC sales are dying. That's not even an HP problem, it's a PC market problem, as mobile devices like tablets eat significant market share. HP clearly needs to have some sort of product in this market if it wants its personal systems division to stay relevant, and until very recently, it didn't. But after messing about for far too long (famously cancelling its WebOS-based TouchPad after only a month). This may have been Leo's biggest mistake, far bigger than Autonomy, since HP squandered two years and precious mind-share time.  The product, priced wrongly and in the wrong channel, actually had the best user ratings of any tablet at the time and for months thereafter in the enterprise space, viz. user-tracking data from Argus Insights).  As these things happen though, it will never be reported that way unless we do another book.  HP has finally thrown in with a mobile OS — Android. It's Slate 7 looks to be very competitive with other Android tablets on the market, and at $169, it's priced to move. Watch sales figures on this very carefully.

Smart TVs
HP hasn't entirely jettisoned WebOS, either. It's sold many of the key assets to the electronics giant LG, which plans to use it to develop next-generation smart TVs. This is a coup for HP, as it's keeping the assets that would drive a WebOS app store, which could potentially be as profitable for the company as it is for Apple if those devices take off. There aren't any WebOS powered TVs on the market yet, but their success when they do get released might be an important indicator for HP.  Again, AH YES, what might have happened if Jon Rubinstein had been given full autonomy to run his Palm division with Phil McKinney and team?  HP'd have WebOS still running, linked to all the imaging products, as well as PCG, almost three years of building industrial-grade enterprise-wide communications networks, and some accumulated street knowledge.  After all, the cookie guy at IBM took several years to get the enterprise services group functioning.  What this Smart TV line item doesn't suggest is that HP will be the producer of next-gen smart TVs, just potentially a channel.  This is akin to owning the keys to the Apple stores, but not making the Apple products.  True, an App Store could have a run, but HP's experience base in this arena is modest indeed.  Again, recall it took Apple four tries and five years to get the iPod right with iTunes.

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