Two HPs: Twice The Challenges, Opportunities

| About: HP Inc. (HPQ)
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HP cloud may need M&A help.

Real enterprise rival is Amazon - not Cisco or IBM.

Flat SaaS revenue is alarming.

PCs surprisingly strong.

As Hewlett-Packard (NYSE:HPQ) marches forward with its "separation" strategy (HP executives refuse to call it a breakup), the challenges for two HPs (one enterprise-focused, one PC-focused) are coming into focus. And the challenges increasingly involve the cloud.

Rewind to HP's earnings call last week when CEO Meg Whitman mentioned cloud computing seven times, according to Seeking Alpha's earnings call transcript. But never once did Whitman and her team actually say how much money HP generated from the cloud - though she said SaaS revenues are flat. That has me concerned.

We keep hearing about new HP cloud milestones:

  • A new Haven OnDemand offering, announced Tuesday, "gives organizations of all sizes cloud-based access to key components of HP's world class analytics platform," the company claims.
  • The new offering runs on HP's Helion Cloud - which is mostly new and very late to the game versus (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) Azure, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Cloud Platform and IBM's (NYSE:IBM) SoftLayer.
  • A new consulting push to sell, service and support Microsoft's Office 365 cloud platform, also announced Tuesday. HP was an early leader supporting Microsoft Exchange Server on-premises more than a decade ago, but this Office 365 relationship comes later than I would have expected.

New Clouds, Old Challenges

The big question - Can those and other HP cloud services make up for weakness across most of HP's other business lines? Consider the facts from the company's Q4 2014 results, disclosed last week:

  • Printing revenue was down 5% and supplies revenue was down 7%. HP has announced a major 3D printer push to help jumpstart growth in fiscal 2015, but I still consider 3D printing a relative niche versus traditional printing. Market researcher Canalys is more optimistic than me, predicting 3D printer market revenues will hit $16.2 billion in 2018 versus $2.5 billion in 2013. Whatever the case, HP is late to market against several first-mover rivals.
  • Enterprise group revenue dropped 4% year-over-year in Q4, with weakness across x86 servers (down 2%) and storage (down 8%), with 2% growth in networking. The obvious strategy is to compete more aggressively against Cisco (NASDAQ:CSCO), EMC (EMC) and IBM. But, in reality, HP must skate faster to where the puck is going - cloud workloads rather than on-premises hardware sales.
  • Enterprise services revenue dropped 7% year-over-year in Q4. Here again, I don't think the challenge involves IBM Global Services or other traditional rivals. Instead, consulting revenue is drying up as big IT projects get replaced by fast cloud rollouts. And HP needs those rollouts to occur in its own cloud.
  • Software revenue dropped 1% and SaaS revenue was flat. Let me repeat that: At a time when the cloud is enjoying double-digit growth in many sectors, HP's SaaS revenue was flat. Something's terribly wrong there.
  • PC revenue actually grew 4% year-over-year for the quarter. That's impressive, but I'm concerned about the PC business post breakup. HP is essentially drawing a line between its PC and server businesses - and many customers don't want that line. They buy PCs and servers as part of larger deals, so HP will need to figure out how to keep those customers happy post-company breakup.

Overall, I'm also deeply concerned about HP's ability to focus on small and midsize businesses during the company breakup. HP sales leaders are focused on big enterprise customers at the moment. But the company will need to work closely with channel partners to keep smaller businesses happy amid the HP breakup.

Reasons for Hope

Still, HP is in reasonably good shape thanks to Meg Whitman's stabilizing leadership. She's pumped more money into R&D - $876 million for Q4 2014 vs. $729 million in Q4 2013 - and restored innovation to HP's Garage.

The product pipeline includes extensive Moonshot server technology, more Big Data tools and that 3D printer portfolio. Near term, I suspect talent recruitment and retention will become Whitman's biggest challenges, as current and potential employees monitor the breakup's progress.

But longer term, two "separate" HPs should actually help the enterprise and PC businesses attract talent. After all, candidates will know exactly where each HP is placing its bets - erasing years of debate about the PC business in particular.

Potential Buyout Target

Overall, HP finally has a cloud story. Now, the company must muscle aside Amazon, Microsoft and even IBM SoftLayer as cloud conversations heat up in large businesses. In some ways, I wish HP would buy Rackspace (NYSE:RAX) to counter the IBM SoftLayer business. But then again, we've all seen how HP acquisitions (Palm, Autonomy) frequently implode.

This time, maybe the safest path for HP is for Whitman to depend on the R&D garage, and good execution on the "separation" plan into two companies.

Disclosure: The author is long RAX.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.