By: Joseph Morrison
The computing hardware space has matured and consolidated to a handful of titans who vie for market share. Companies like Hewlett-Packard (HPQ) and Dell (DELL) have transformed their firms from basic hardware providers and have diversified their offerings to stay more competitive in their space. HP has always been a diversified company since the partnership between Bill Hewlett and Dave Packard in 1938 in the famous garage. Their first product was an audio oscillator and HP has since followed the early quote from Bill Hewlett, "Anything for a nickel." HP has invented all types of products since then ranging from the famous HP 12C Calculator (CFA Candidates know this well) to the first ever personal computer to printers, an industry in which HP is still a leader.
Dell has had a much different history. Michael Dell founded PCs Limited in 1984 and grew the company quickly, realizing an $85 Million market capitalization in 1988 with the firm's IPO. Dell has historically specialized in putting together high-performing machines at a value and offering superlative service. Dell has also been famous for inventory management, which helped the company flourish when Dell began 1-to-1 marketing and producing computers customized to the specific end-user's selections.
Looking at HP's financial statements, specifically the "Segment Information" it is evident that HP is still a leader in the PC and printer industry but that is no longer the main source of income for the firm. Services have taken hold as the main source of income for HP as an $8.711Billion revenue center in the quarter ending 10/1/12. HP offers a wide array of services including application services, outsourcing services, support services, and technology consulting.
HP is still the leader in PC sales but HP is at negative growth in this segment according to the most recent International Data Corporation (IDC) report on PC shipments. HP maintains the lead in worldwide market share with 16.5% of the market while Dell places third with 11.0%. Lenovo is in second with 14.9% but we will omit them for the purpose of this article because they are only traded on American exchanges as an ADR.
Dell's income statement paints a different picture than HP's financial statements. Dell's main revenue source is in mobility with $3.253 Billion, which barely edges out Dell's performance in desktop PCs in the quarter ending 11/2/12. It should be noted that by mobility, Dell means mostly laptops since Dell only offers two tablets and no mobile phones.
Strategy for Future
Both of these firms are in turnaround phases. HP famously has enlisted new CEO Meg Whitman to lead the turnaround of HP. In a recent analyst conference, Whitman spoke about her strategy to turnaround this tech giant. CEO Whitman spoke about fixing many operational problems such as better aligning the cost and revenue structure, which has been widely spoken about. She also spoke about the switch over to Salesforce.com as the new CRM for HP and this transition has been famously successful.
Additionally, CEO Whitman spoke about the market trends, which need to be addressed in better ways, specifically mobility, big data, cloud computing, software and consulting, etc. One very intriguing possibility that Whitman spoke about was spinning off the PC division and I do believe that there is value in a breakup of HP. The thought is that perhaps HP is too diversified and has too many areas of focus. If HP can spinoff segments of its business portfolio such as the PC division, it can unlock value in both HP as well as in that division. In this analyst conference, Whitman spoke about how partners and customers alike were unhappy with the talk of a breakup. I do think, however, that the best way forward is for HP to spinoff segments of the business portfolio which are matured markets, such as PC and focus on segments with greater growth potential such as software as a service, cloud computing, enterprise servers, storage, networking, etc. One thing that cannot go unsaid is the acquisition of Autonomy which has been a debacle. The importance of Autonomy is a massive portion of the 10/5/12 Analyst Conference, so much so that it is listed as the first of four disruptive technologies which HP has. The debacle is an accounting issue and is based upon cooked up revenues. This has nothing to do with computer code. In my opinion, if HP sees value in a patented technology and believes it can implement it properly, who cares if there was an accounting issue prior to the acquisition? Leave that to the legal team. If HP can take the Autonomy software and use it to do "meaning-based computing" as they believe it can and they can leverage this into revenue, the rest will fall into place. The write-down is painful but far from crippling.
Michael Dell has recently returned to save his namesake firm. Dell came back as CEO in 2007 when Dell was clearly on the verge of oblivion. Michael Dell has a different strategy going forward than HP. Firstly, Michael Dell believes in the PC especially with Windows 8 making a splash at market. Dell computers have long been a standard as a data center and will continue to be with the x86 servers as the leader. Dell is taking a stronger hold in the software market especially with SonicWall and SecureWorks as the leaders for the firm in security software. Dell has made acquisitions as well as innovations to bring the computing infrastructure together for firms. The acquisition of firms such as Force10 and the development of software such as Boomi have created an environment where Dell customers can easily go from client to server to cloud in any order or direction easily and securely.
My ultimate verdict is that I like HP more as a firm than Dell. In my opinion, HP is better positioned at this time to take advantage of the new markets such as cloud, software consulting and data storage. While it is well known that HP faces significant macroeconomic and operational challenges, I believe that Dell faces mostly the same challenges. I share the opinion of many analysts that the best way for HP to become a real value for shareholders is to spinoff segments of the firm such as the PC division. It is my opinion that the best way for Dell to become a value is for Michael Dell to take the firm private. I have faith in Michael Dell as a visionary CEO but I believe that vision is often times limited by the need to appease shareholders. I believe that Michael Dell will need to be more nimble as a CEO than shareholders will allow and that in order for him to bring his firm back to prominence, he will need to take it private for a time to reinvent it in the way he sees fit. He had spoken about it before and I hope this time, he follows through. There is now talk that Dell is speaking with two private equity firms about going private and this further illustrates that Dell's turnaround can only be realized as a private firm. I applaud this news and I hope that it comes to fruition.
Additional disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.