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Shades of Blue reflected in HP's dramatic reshuffling

HP faces uphill climb as it tries to muscle in on software world

By , Network World
August 19, 2011 10:09 AM ET

Network World - HP's plans to get out of the PC business, acquire software maker Autonomy and retreat from its webOS device investments will, if all goes as planned, let the tech giant sharpen its focus on enterprise IT markets and capitalize on the software-centric strengths of CEO Leo Apotheker.

"As an executive who has spent most of my career primarily in software, it is a world I know well," Apotheker said during the company's news-filled earnings call on Thursday.

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But it's an uphill climb nonetheless, as software has been responsible for only a small fraction of HP's revenue in years past. In 2010, HP Software generated $3.59 billion in revenue, or 3% of the company's $126 billion total revenue. But it's on the upswing: HP Software logged 20% year-to-year growth and reached $780 million in revenue in the second quarter of 2011, driven by last year's acquisitions of Fortify and ArcSight, notes Jillian Mirandi, an analyst at Technology Business Research (TBR). HP's fastest growing business unit is also its most profitable, with a 19.4% operating profit.

Conversely, HP's Personal Systems Group, which sells PCs, tablets and smartphones, has the company's lowest profit margin, although it accounted for nearly one-third of HP's overall revenues in 2010. HP's decision to let go of its massive and industry-leading (albeit slow growth and low margin) PC business is a sign of just how severely the explosive tablet market has damaged the PC market.

The PC business is the first obvious domino to fall as Apotheker tries to bring greater profitability to the company, says Ezra Gottheil, a senior analyst at TBR. "It's a much more exaggerated consequence of the [direction] the company decided to go with Leo Apotheker. Clearly the board wanted higher margins," he says.

The planned PC spinoff echoes IBM's sale of its PC business to Lenovo in 2005 to focus on higher-margin enterprise software and services. However, "HP will be challenged to drive software to be the kind of generator of profit that it is at IBM," Gottheil says.

Another challenge is finding a new home for the world's largest PC business; HP estimates it will take 12 to 18 months to sell, spin off or otherwise give the PC business the independence it needs to continue.

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