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Cisco CEO John Chambers has been taking a lot of public shots at Meg Whitman, a sure sign the head of the networking giant considers a Hewlett-Packard (NYSE:HPQ) with Whitman at the helm a threat. Given the plunge in HP's stock since Meg Whitman took the helm in 2011, should Chambers be worried?

As the former eBay CEO sheds and auctions off low margin businesses, Hewlett-Packard is increasing market share in the high margin server and networking businesses Cisco leads in. But if Chambers is losing sleep it is more likely due to HP's lead in the booming cloud infrastructure market. In 2012, Cisco grew its cloud infrastructure business 39% to $4 billion.

With John Chambers worried, how is it then that Whitman has greatly disappointed the market with a lower earnings estimate for fiscal year 2013? The HP story has not changed through five CEOs since 2005. The company needs focus, echoed Whitman at a recent investor conference. In the effort to turn the company around, Whitman may be the first CEO not to add more bloat. Instead, she is shedding the money losing enterprise services business Mark Hurd added with the acquisition of EDS.

Whitman's sharpened focus is on high margin businesses around the cloud, mobility, data security, applications and integration areas. Higher growth cloud computing, information optimization and data security are expected to drive 20% of revenue going forward. Yet with a full turnaround not expected until 2016, revenues are forecasted to decline 11% to 13% in 2013 on operating margins of 0% to 3%. In the third quarter, revenues declined 5% to $29.7 billion. Operating margins fell 0.6% to 9.2%.

The challenge for HP is resources. In the cloud computing market, for example, competitors are growing through a combination of organic growth and acquisitions. Oracle (NYSE:ORCL) has made billions of dollars in acquisitions in the software as a service space over the last year, recently buying project management software company Instantis. SAP and [[IBM]] have also been acquisitive. Cloud opportunities are creating increased competition for HP's high growth software business, which saw revenue growth of 18% in the third quarter year-over-year and enjoys 18% operating margins. Whitman understands the stakes. "[Cloud computing] could well define H-P in 5 to 10 years," she told the audience at Gartner's annual symposium.

The revolving door of CEOs have racked up debt and spent all the cash. And as YCharts shows since mid-2010, the HP has taken on substantial long-term debt while paying down minimum short-term debt. Whitman's real problem - also aptly visualized by YCharts - is the masking of the extent of the mismanagement through stock buybacks to lift the stock price.

Fortunately, Whitman is showing that she is strong on smart strategy and execution. One high end, high margin business poised to see widening operating margins is enterprise-class servers, which were a healthy 15% in 2011 versus 20% for IBM. Based on new high performing chips, HP has introduced five new servers, upgrades of its Integrity line. The newest iteration of the Itanium chip, the Itanium 9500, co-developed with Intel is providing twice the performance of comparable chips while reducing power consumption. HP recently won a lawsuit against Oracle that threatened the future of the Itanium chip. Oracle, which is appealing the decision, no longer wanted to develop the database software to run on Integrity and the Itanium chip.

Overall, HP has logged impressive growth in the enterprise server, storage and networking market. China has been a key market for HP where some of its growth has come at the expense of market leader Cisco (NASDAQ:CSCO). HP has felt the slowdown in the global enterprise router market, led by China. In ethernet switches, where HP has been gaining market share for several years, it lost market share but saw revenue growth in a market that was up 13% to $5 billion in the second quarter. HP has become the number one vendor and is seeing record growth in smart managed switches. In the wireless LAN market, HP moved ahead of Motorola to take the number three spot after Cisco and Aruba.

Following an endless string of fumbles in the PC business some analysts, feeling HP has overstayed its welcome, have been pushing for a spin off. HP's new product lineup may bring the division back to life. Dropping words such as 'retooling,' 'creating efficiencies' and 'combining,' it is clear that HP is trying to restructure and rightsize the PC and printing businesses.

With the introduction of Microsoft's Surface tablet, the market shift to the mobile tablet PC is well underway. The risk is for HP to get left on the high end. Its notebook/tablet hybrid play is the HP Envy x2 retailing in the $850 range, which has a keyboard that detaches from the tablet. For the business market, the sleek 9.2 mm HP ElitePad is powerful and elegant but pricing, a key factor, has yet to be announced. In the most recent quarter, Lenovo (OTCPK:LNVGY) overtook Hewlett Packard in PC shipments. China's leading PC maker, however, is operating on thin margins of around 1.5% to 2.5% versus 6.3% margins for Dell (NASDAQ:DELL). HP's operating margins fell from 5.7% to 4.7% in the second quarter year-over-year.

After the failed HP Touchpad, HP no longer has a presence in the lower end tablet race. The mobile tablet PC race will be off when Microsoft (NASDAQ:MSFT) releases its MSOffice suite for Androids and iPads in 2013. Notebook users will be then be choosing between $1,000-plus Windows touch notebooks and $500 tablets, a market now dominated by Microsoft's Surface, the Apple (NASDAQ:AAPL) iPad and Android offerings by Samsung (OTC:SSNLF), ASUS, Dell and others. As PC and tablet markets converge, HP will be competing with Apple's 30%-plus operating margins.

If HP maintains its focus on the high road, high margin cloud, data, server and networking route, Whitman's 2016 turnaround should remain on track. This may be the last time to make a go of the PC business, however, before the market starts calling more loudly for a spinoff. If the HP ElitePad performs as elegantly as it looks, HP will be in the race in the mobile tablet PC market.

Source: HP's Next Chance: High-End Tablets