HP to spin off PC business, shutter webOS device division

Hewlett-Packard announced on Thursday that it is investigating both selling off its PC business and purchasing analytics software vendor Autonomy—moves that will allow it to focus on the higher-margin enterprise business revolving around software, services and servers. The company also said that it is shuttering its webOS device business, specifically the TouchPad tablets it announced earlier this year and its webOS smartphones, but will continue to look into opportunities for the webOS software.

The news comes hand-in-hand with HP’s latest quarterly financial results, in which it posted revenue of $31.2 billion, up slightly from its year-ago number of $30.7 billion. The company also slightly dropped estimates for its fiscal year 2011 numbers, revising its expected revenue to $127.2 billion from $127.6 billion and targeting diluted earnings per share in the range of $3.59 to $3.70, down from a minimum of $4.27.

HP’s Personal Systems Group, which sells PCs, tablets and smartphones, has the company’s lowest profit margin although it accounted for nearly a third of HP’s overall revenues in 2010. PC sales—particularly consumer products—tend to fluctuate more than business solutions and services as they are more sensitive to seasonal buying trends and economic trends, said Charles King, principal analyst at Pund-IT.

“By spinning off PCs, HP could effectively isolate potentially volatile financial numbers and their effect on its more stable, higher-margin businesses,” King said.

The company said that it was considering a variety of options for the Personal Systems Group, including “a full or partial separation” from the company.

In doing so, HP is following in the footsteps of IBM, which spun off its PC business to Lenovo in 2005 to focus on the higher-margin software and services business. HP may also feel pressure from Apple, which has released highly profitable consumer products such as smartphones and tablets. Apple’s tablets have hurt PC shipments, a market that HP dominates as the world’s largest PC vendor.

HP’s PC business has been marginally profitable, but the margins have shrunk over the years, said Roger Kay, president of Endpoint Technologies Associates.

“It certainly goes against Carly Fiorina’s theory of ‘all’s well together,’” Kay said. HP bought PC maker Compaq for $25 billion in 2002 when Fiorina was CEO.

Meanwhile, the purchase of Autonomy would be “completely in keeping with the increased focus on software and business solutions that HP’s board had in mind when they hired [CEO] Leo Apotheker,” said King.

Based in both San Francisco and Cambridge, Autonomy provides a variety of portal, enterprise search, content management and analysis tools to organizations.

“Autonomy focuses mostly on search and analytics of unstructured data and databases, which includes information that typically can’t be captured within traditional relational databases,” King said. It has grown a healthy business in the enterprise content space: Autonomy reported revenue of $870 million for 2010.

Traditionally, HP’s enterprise services and hardware sales have dwarfed its software sales. For fiscal 2010, services generated almost $35 billion in net revenue and enterprise hardware generated $18.5 million, while software brought in $3.5 billion. Autonomy’s sales could push that figure past the $4 billion mark

While starting in the enterprise search space with in-house technology, the company expanded its software portfolio through its acquisitions of Verity in 2005 and Interwoven in 2009. It also acquired informational governance software from CA Technologies in 2010.

Such a software portfolio would be “a natural complement to HP’s efforts and technologies” in the enterprise content space, King said. It would dovetail particularly well with HP’s Vertica database and 3PAR data storage products.

The software would also give HP a foothold in the emerging big data space, where it could build systems to compete with EMC’s Greenplum and IBM’s Netezza. “Both [of those] companies consider Big Data a market with a potentially huge future,” King said.

In March, then-newly appointed HP CEO Apotheker announced that HP would concentrate more efforts on the data analytics and big data markets.

The PC business is the first obvious domino to fall as Apotheker tries to bring profitability to the company, said Ezra Gottheil, senior analyst at Technology Business Research.

“It’s a much more exaggerated consequence of the [direction] the company decided to go with Leo Apotheker. Clearly the board wanted higher margins,” Gottheil said. However, “HP will be challenged to drive software to be the kind of generator of profit that it is at IBM,” Gottheil added.

But HP does potentially have something to lose if its PC business goes away—such as some of the leverage it has in buying high-end server parts, Gottheil said.

Elizabeth Heichler of IDG News Service contributed to this report.

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