Enterprise IT Watch Blog

Aug 23 2011   8:07AM GMT

Old HP’s one bright spot: Eating Cisco’s Lunch

Michael Morisy Michael Morisy Profile: Michael Morisy

HP ditching a low-margin business to focus on new software initiatives? Sure sounded a lot like the recent headlines could have applied to HP’s inroads in the networking business, which have come largely at the cost of undercutting Cisco’s networking, storage and server markets in a brutal price war. And while the real (first) victims were HP’s market-dominating consumer PC division and its nascent attempts at mobile greatness, WebOS, my curiosity was piqued: What will happen to HP’s corporate hardware, now that it’s becoming a corporate software company?

A new hope

As a little background, if you haven’t heard: Léo Apotheker, who was named HP’s president and CEO a little over a year ago, announced that the company’s PC division was going to be spun off, and its mobile hardware division wound (although the company claims WebOS will live on in licenses). At the same time, it was announced that HP was acquiring a U.K. company called Autonomy, which dubs itself the pioneer of “meaning-based computing.” The technology looks like a mix of e-discovery, enterprise search and fancy graphs, with a business very similar to Apotheker’s last company, SAP. In fact, the acquisitions $10 billion price tag and Apotheker’s statements have made clear that this company is critical to charting HP’s future strategy.

“Autonomy has an attractive business model, including a strong cloud based solution set, which is aligned with HP’s efforts to improve our portfolio mix,” he said in a press release. “We believe this bold action will squarely position HP in software and information to create the next-generation Information Platform, and thereby, create significant value for our shareholders.”

And while the release goes on to talk vaguely about how this acquisition “aligns” with the rest of HP’s IT divisions, the fact is Autonomy is a largely cloud-driven company which seems like it would benefit very little from any enterprise synergies, except as far as HP could de-commoditize cheap hardware by putting expensive software on it.

Show me the money

The strange thing is, I could find almost nothing, even among my tech press peers, about what this means for HP. It’s like everyone forgot that the division even existed except for as a vague synergy. But deep down on HP’s summary of its Q3 earnings, some hopeful notes:

Enterprise Servers, Storage and Networking (ESSN)revenue grew 7% year over year with a 13.0% operating margin. Networking was up 15%, Industry Standard Servers was up 9%, Business Critical Systems was down 9%, and HP Storage was up 8%. 3PAR revenue accelerated, with triple-digit year-over-year growth operationally.

That’s not the 20% growth the software side of HP saw, and they didn’t highlight margins or any actual numbers (Is it a tiny part of the overall business? Is it profitable yet?), but it’s a lot more enticing than the sales dud that was WebOS, particularly since the enterprise market is less fickle and easier to squeeze a long-term margin out of then consumers.

For some context, the company’s last quarterly statement included this breakdown (note that all numbers are in millions):

Three months ended April 30
Net Revenue Earnings (Loss)
from Operations
2011 2010(1) 2011 2010(1)
In millions
Services $ 8,977 $ 8,842 $ 1,361 $ 1,401
Enterprise Servers, Storage and Networking(2) 5,556 4,837 766 624
HP Software(3) 764 653 154 167
HP Enterprise Business 15,297 14,332 2,281 2,192
Personal Systems Group 9,415 9,956 533 465
Imaging and Printing Group 6,745 6,396 1,144 1,098
HP Financial Services 885 755 83 69
Corporate Investments(4) 72 66 (198 ) (65 )
Segment total $ 32,414 $ 31,505 $ 3,843 $ 3,759

As you can see, while ESSN (HP’s catchall for their IT hardware) is profitable, but just chump change compared to the money they get from enterprise services and those higher-value options they can lay on top of their hardware. With that background, an SAP-ish future for HP makes a lot of sense. Particularly since, later on in the quarterly filing, HP acknowledges that it is fighting a way on many fronts, spreading itself too thin:

Unlike many of our competitors, we have a portfolio of businesses and must allocate resources across these businesses while competing with companies that specialize in one or more of these product lines. As a result, we may invest less in certain areas of our businesses than our competitors do, and these competitors may have greater financial, technical and marketing resources available to them than our businesses that compete against them. Industry consolidation also may affect competition by creating larger, more homogeneous and potentially stronger competitors in the markets in which we compete, and our competitors also may affect our business by entering into exclusive arrangements with existing or potential customers or suppliers.

I’ll take a look at the latest HP financial statements as they become available, and hopefully we can learn more about the fate of ProCurve and the rest of the HP enterprise hardware family.

Michael Morisy is the editorial director for ITKnowledgeExchange. He can be followed on Twitter or you can reach him at Michael@ITKnowledgeExchange.com. Image via Flickr user John McNab.

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  • Arrington’s Awful HP Advice: Leave commodity PC market for a worse one - Enterprise IT Watch Blog
    [...] IT Watch Blog « Old HP’s one bright spot: Eating Cisco’s Lunch Aug 23 2011   10:34AM [...]
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  • Tessa Parmenter
    I'll be interested to hear how HP progresses with ProCurve and its enterprise hardware family, too, though I got a clue when I spoke to HP at [A href="https://searchenterprisewan.techtarget.com/news/2240036255/Interop-2011-Las-Vegas-recap-Wide-area-network-news"]Interop 2011 Las Vegas[/A] this spring. At the conference, HP reached out to speak to me about its WAN optimization strategy. Not knowing they had one, this piqued my interest. HP Networking Product Line Manager Mark Hilton (along with several PR and marketing reps corralled in their video conferencing booth) explained [A href="http://h20427.www2.hp.com/solutions/networkservices/au/en/pdf/WAN_Optimisation_Service_Brochure.pdf"]HP's WAN optimization service [/A] -- which, to put bluntly, is not HP's WAN optimization at all, but an integration with partners at varying levels: One is to meet in the channel; the other involves preloading third-party WAN optimization software onto HPs Ethernet switches. At our discussion, Hilton explained HP uses the WAN optimization software from Riverbed, Microsoft and Avaya, and more to come (F5 perhaps?). As far as HP's networking strategy is concerned, this aligns very closely with what you got at with HP's Autonomy acquisition. As you state it, "HP could de-commoditize cheap hardware by putting expensive software on it." -- HP's networking M.O. I think you hit the nail on the head.
    1,160 pointsBadges:
  • The IT Blog Top 10: September 1, 2011 - ITKE Community Blog
    [...] 8. HP is on everyone’s lips (and screens, apparently) - Old HP’s one bright spot: Eating Cisco’s lunch. [...]
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  • HP: We’re committed to the PC … just in an open relationship - Enterprise IT Watch Blog
    [...] of the recent valid criticisms (Michael Arrington’s excepted): While the plan to remake HP makes sense at a strategic level, the public execution has been blunder after blunder. This has squandered years of good will and [...]
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