HP's Autonomy Buy Is a Move Toward a More Stable Enterprise Business

Aug.19.11 | About: HP Inc. (HPQ)

Hewlett-Packard Co. (NYSE:HPQ) chose the occasion of its Q3 earnings call to drop the bomb: The company that focused on Converged Infrastructure under former CEO Mark Hurd, spending almost $7 billion to buy Palm, 3COM, and 3PAR, is now pulling a 180 and ditching both the PC and Palm hardware business. Additionally, HP is making an offer to buy Autonomy (OTC:AUTNF), one of the last major independent enterprise content management players, for roughly $11 billion.

At first glance, the deal makes perfect sense, given Leo Apotheker’s enterprise software orientation. From that standpoint, Apotheker has made some shrewd moves, putting aging enterprise data warehouse brand Neoview out of its misery, following up weeks later with the acquisition of Advanced SQL analytics platform provider Vertica. During the Q3 earnings call, Apotheker stated the obvious as to his comfort factor with Autonomy: “I have spent my entire professional life in software, and it is a world that I know well. Autonomy is very complementary.”

There is potential synergy between Autonomy and Vertica, with Autonomy CEO Mike Lynch (who will stay on as head of the unit, reporting to Apotheker) that Autonomy’s user screens provide the long missing front end to Vertica, and that both would be bound by a common “information layer.” Of course, the acquisition not being final, he did not give details on what that layer is, but for now we’d assume that integration will be at presentation and reporting layer. There is clearly a lot more potential here -- Vertica, for now, only holds structured data, while Autonomy’s IDOL system holds everything else. In the long run we’d love to see federated metadata and also an extension of Vertical to handle unstructured data, just as Advanced SQL rivals like Teradata’s Aster Data already do.

According to my ovum colleague Mike Davis, who has tracked the company for years, Autonomy is one of only three ECM providers that have mastered the universal document viewer -- Oracle’s (NYSE:ORCL) Stellent and an Australian open-source player being the others. In contrast to HP (more about this in a moment), Autonomy is quite healthy, with the latest quarterly revenues up 16% year-over-year, operating margins in the mid-40% range, and a run rate that will take the company to its first billion-dollar year.

Autonomy is clearly a gem, but HP paid dearly for it. During Q&A on the earnings call, a Wall Street analyst took the matter back down to earth, asking whether HP had gotten such a good deal, given that it was paying roughly 15% of its market cap for a company that will only add about 15 to its revenues.

Great, expensive acquisition aside, HP’s not doing so well these days. Excluding a few bright spots, such as its Fortify security software business, most of HP’s units are running behind where they were last year. Q3 net revenue of $31.2 billion was up only 1% over last year, but down 2% when adjusted for constant currency. By contrast, IBM’s (NYSE:IBM) most recent results were up 12% and 5% when currency-adjusted. Dennis Howlett tweeted that it was now HP’s turn to undergo IBM’s near-death experience.

More specifically, HP Software was the bright spot, with 20% growth year-over-year and 19.4% operating margin. And by contrast, the printer and ink business -- long HP’s cash cow -- dropped 1% year-over-year with the economy dampening demand from the commercial side, not to mention supply chain disruptions from the Japanese tsunami in March.

By contrast, services grew only 4%, and is about to kick in yet another round of transformation. John Visenten, who ran HP’s enterprise services in the Americas region, comes in to succeed Ann Livermore. The problem is, as Ovum colleague John Madden states it, HP’s services have "been in a constant state of transformation” that is making some customers’ patience wear thin. Ever since acquiring EDS, HP has been trying (and trying) to raise the legacy outsourcing business higher up the value chain, with its sights set, quite literally, in the cloud (computing).

The trick is that, as HP tries aiming higher up the software and services food chain, it deals with a market that has longer sales cycles and long-term customer relationships that prize stability. Admittedly, when Apotheker was named CEO last fall, along with enterprise software veteran Ray Lane on the board, the conventional wisdom was that HP would train its focus on enterprise software. So to that extent, HP’s strategy over the past 9 months has been almost consistent – save for earlier pronouncements on the strategic role of the tablet and WebOS business brought in with Palm.

But HP has been around for much longer than 9 months, and its latest shifts in strategy must be viewed with a longer perspective. Traditionally an engineering company, HP grew into a motley assortment of businesses. Before spinning off its geeky Agilent unit in 1999, HP consisted of test instruments, midrange servers and PCs, a token software business, and -- lest we forget -- that printer business. Since then:

  • The 2001 acquisition of Compaq that cost a cool $25 billion on Carly Fiorina’s watch. That pitted it against Dell and caused HP to assume an even more schizoid personality as consumer and enterprise brand.
  • Under Hurd’s reign, software might have grown a bit (they did purchase Mercury), but the focus was directed at infrastructure – storage, switches, and mobile devices as part of the Converged Infrastructure initiative.
  • In the interim, HP swallowed EDS, succeeding at what it failed to do with its earlier ill-fated pitch for PwC.

Then:

  1. Hurd gets tossed out...
  2. ...and almost immediately lands at Oracle;
  3. Oracle pulls support for HP Itanium servers,
  4. HP sues Oracle...
  5. ...and its Itanium business sinks through the floor.

That sets the scene for today’s announcements that HP is “evaluating a range of options” (code speak for likely divestment) for its PC and tablet business – although it will keep WebOS on life support as its last gasp in the mobile arena. A real long shot: HP’s only hope for WebOS might be Android OEMs not exactly tickled pink about Google’s (NASDAQ:GOOG) going into the handset business by buying Motorola’s (NYSE:MMI) mobile unit.

There are logical rationale for dropping those businesses – PCs have always been a low-margin business in both sales and service, in spite of what it claimed to be an extremely efficient supply chain. Although a third of its business, PCs were only 13% of HP’s profits, and have been declining in revenue for several years. PCs were big enough to provide a distraction and low enough margin to become a drain. And with Palm, HP gained an eloquent OS, but with a damaged brand that was too late to become the iOS alternative -- Google had a 5-year head start. Another one bites the dust.

Logical moves, but it’s fair to ask, what is an HP? Given HP’s twists, turns, and about-faces, that's a difficult one to answer. OK, HP is shedding its consumer businesses -- except printers and ink, because in normal times they are too lucrative -- but HP still has all this infrastructure business. It hopes to rationalize all this in becoming a provider of cloud infrastructure and related services, with a focus on information management solutions.

As mentioned above, enterprises crave stability, yet HP’s track record over the past decade has been anything but stable. To be an enterprise provider, technology providers must demonstrate that they have a consistent strategy and staying power, because enterprise clients don’t want to be left with orphaned technologies. To its credit, today’s announcements show the fruition of Apotheker’s enterprise software-focused strategy. But HP’s enterprise software customers and prospects need the assurance that HP won’t pull another about-face when it comes time for Apotheker to be succeeded.

Disclaimer: Author is an analyst with Ovum; the opinion stated does not necessarily reflect that of Ovum.