On the company’s earnings call this afternoon, HP’s Leo Apotheker and CFO Cathy Lesjack explained why the company is shutting down the Palm hardware business.
It boils down to these reasons:
- Terrible sales. Sales were so low that the group’s operating losses ($322 million) were greater than its revenues ($266 million). Those losses would have increased in the next quarter. It would have taken perhaps years to ramp up the Palm hardware business to turn this around — and there’s no guarantee it ever would have happened. So they decided to cut their losses with a $1 billion charge next quarter, and perhaps make some of the difference up by licensing the software.
- Google-Motorola. CEO Leo Apotheker noted that the mobile market is undergoing some huge changes, and said that “This week’s news only reiterates the speed of change in this space.” In other words, WebOS devices were having a hard enough time competing against Android before. With Google in the hardware space, the going will get even harder.
The stock is down almost 10% after hours — that’s on top of a 6% drop during the day.
Here’s our coverage of the earnings call itself.
5:05ET: Leo Apotheker is talking about today’s crazy news. It’s all about driving shareholder value.
“Sales of the TouchPad are not meeting our expectations.”
They are exploring spinning off the Personal Systems business.
Enterprise services needs to be reshaped. That effort is underway, and they’re announcing a new leader today.
5:08: Clear changes in PC space. “The tablet effect is real.” For our PC business to remain the world’s largest personal computing business, needs flexibility and agility.
That’s why they’re exploring strategic alternatives. A spinoff would take at least 12 to 18 months.
analysing WebOs market opportunities. The OS is elegantly designed and attractive platform.
However, our WebOS devices have not gained enough traction, and we see too long a ramp up in the market share. “This week’s news only reiterates the speed of change in this space.”
(He’s referring to Google-Motorola.)
The shutdown will happen in Q4.
5:11: Now he’s talking about services business. New leader: John Visentin
5:12: “Must address Oracle’s anticompetitive behaviour.”
Earthquake in Japan hurt supply chain.
Now he’s talking about the March strategic vision announcement, which he’s more convinced is the right one. Software, cloud, more higher-margin growth opportunities.
Terms of recommended transaction — will acquire all outstanding shares of Autonomy 25.50 pounds per share. Expects to complete by end of year.
Autonomy is leader in helping enterprises figure out what’s going on with their unstructure data. Operating margins above 40%. (Nice — software!) Consistent double-digit revenue growth.
Acquisitions have been good so far, software business is growing. This will help.
5:18: Increased market volatility, especially today. But the market fluctuations don’t change the opportunity for HP.
5:19: “Lowering Q4 guidance to be realistic about where we are and challenges we’re facing. I don’t take this action lightly. I know investors don’t like to be in this position, and neither do I.”
He’s taking ownership for these investments and decisions.
5:20: Now Kathy Lesjack (CFO) is going through the numbers. You can refer to the release for the details — we’ll just cover the most interesting bits.
Printing, WebOS, and services lower gross margins than last year.
5:22: Personal Systems Group — remains the #1 PC business across notebooks and laptops with 18% share — revenue was down 3%.
Wow — the group that includes WebOS lost $322m during the quarter, which is MORE THAN ITS REVENUE (which was $266m).
“The sellthrough of the product was not what we expected.” They wanted WebOS to be clear #2 for the tablet market.
“Additionally, it quickly became clear that pricing parity would not create demand.” Price dropped $100, added costs.
Needed to align sellthrough expectations with reality. So took a 5-cent charge related to WebOS.
We would have expected an even larger loss for WebOS.
“Essentially, the TouchPad and WebOS phones have not met targets.” They don’t want to make the ongoing investments, “risk without return.”
5:26: Sellthrough in printing supplies (cartridges) slowed down at end of quarter. Tends to reflect economy.
5:30: Expect lower than usual seasonal growth in Q4 because of economic uncertainty and lots of printing supplies in the channel.
Expecting to take a cash charge of $1B to shut down Palm. Yipes.
They’re discontinuing lower-margin businesses. Clearly so.
5:37: Back to Apotheker.
Lot of information to digest. All boils down to driving long-term shareholder value.
“The transition starts today.”
Now we’re into Q&A.
Q: Which segments do you expect to weaken in the next two quarters:
A: Asia-Pacific grew, other two regions shrank. (Constant currency, not current dollars.)
Consumer PC revenue declined, business PC revenue grew. The public sector, which is 10% of its business, has been affected by budgetary constraints. (This echoes what Cisco said last week.)
Q: Services margins are 12.5%, why so low? Did you cut enough costs there? How long will we be there?
A: New leader, increasing coverage, increasing services.
Q: Synergies between printer and enterprise business?
A: Printing is important and profitable for HP, fits solidly into overall strategy. Double-digit margins, industry-leading IP. Digital printing shift, very strong commercial enterprise impact.
Can reinforce strengths in commercial printing market. With Autonomy buy, can have additional IP and accelerate in public sector. (That part of the response made no sense whatsoever. How does Autonomy help printing?)
Q: You’re playing 11x premium for Autonomy when your stock is at an all-time low, trading only at 6x trailing earnings. Comment on price paid and rationale, and what are you thinking on capital allocation.
A: Autonomy will accelerate vision to lead “enterprise information management” space. Higher-value business solutions, help customers manage explosion of info. Will position HP as margin-leader, complement enterprise portfolio, provide printing group a base for digital platform. Accretive to earnings in first full year.
Autonomy as business very profitable financial model.
Q: PC group — why not spin it off right now? Why leave overhang of other strategic moves? And since you’re getting rid of WebOS, what does that mean about pushing it further into PC side? More aligned on Microsoft side?
A: Refrain from commenting on spinoff plans until the board decides.
Regarding WebOS — considering all strategic options on the software. It’s been received well, consumers like it, reviewers like it. All possible business models, from licensing to any other possibility.
Q: PC used to be a strong cashflow business and had a lot of synergies with rest of business around supply chain, and so on. So what about that, why has that changed?
A: One reason to make announcement today is to study all questions you’ve just mentioned.
“I want to make sure that people understand…” (He’s been using that phrase a lot.)
All outcomes are possible, including a NON-sale.
Q: Why isn’t there a major restructuring and efficiency drive in services? What might you have to do there?
A: Look at performance versus peers — we are competing rather well, market share is stable or growing in some businesses. Issues affecting our business in particular? Printing business impacted by Japanese supply chain situation.
But big issue to tackle is productivity in our sales force. Better platform for HP’s solutions, extract way more value out of our sales force.
Q: How much of the corporate losses were due to WebOS? And what’s run rate? How do you get this segment to break even — you’d have to sell more than 60m licenses to break even.
A: Shutting down WebOS device business means ongoing operating expenses (software, marketing, bizdev) probably one to two cents a quarter. So most of those losses are Palm.
Q. How will Autonomy be integrated? Separate or not?
A: Separate entity, but will be identifying synergies as quickly as possible. Give Autonomy access to our channels.