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Author: Beau Skonieczny, Research Analyst Published: 08.18.11

HP, through its plans to shutter webOS and seek alternatives for its PC business, is limiting its exposure to the consumer hardware market and instead going all-in on a strategy of increasing its revenue and margins with an enterprise-focused bundle of software, services, servers and storage. Removing all or part of its low-margin consumer PC business and the expense of fighting its way into the mobile and tablet markets with a fourth offering (after Apple, Google and Microsoft) will improve HPs margins in the short term. The company will be challenged, however, to morph into a highly profitable purveyor of software, services, servers and storage – a goal it has pursued for some time.

Short-term gain: HP regained growth momentum in 2Q11, although the shut-down of mobile Web OS devices will negatively impact margins in 2H11

• HP exceeded expectations in 2Q11 as it targeted higher-growth and higher-margin areas to achieve a 1.6% year-to-year growth in total revenue to $31.2 billion while improving corporate operating margin by 50 basis points over the same period to 8.1% of sales. While HP's commercial business grew 5% year-to-year, consumer sales fell 15% as HP struggled to penetrate the mobile market with its webOS handsets and recently launched TouchPad tablet, attributing to a 3% year-to-year decline in PSG revenue. Enterprise Servers, Storage and Networking sales improved 7% year-to-year, led by a 15% increase in networking revenue. Imaging and Printing Group sales fell by 1% year-to-year. TBR expects HP to maintain more aggressive investment focus on the commercial space, which will help improve margin performance associated with the sale of servers, networking and storage hardware, particularly in more complex cloud engagements. • HP announced it will discontinue operations around webOS mobile devices, including the TouchPad and webOS mobile phones, which TBR attributes to HP's inability to contend with established competitors, such as Apple and Google, in the mobile device arena. Following the outage from the mobile market, HP is in the midst of restructuring and will be charged with shut-down costs, subsequently leading to weaker margin performance in 2H11. HP will maintain webOS assets, which TBR believes will lead to integration with enterprise functionality to help differentiate its offerings and appeal to business users. HP's removal from the mobile handset and tablet space provides an opportunity for other companies to purchase mobile IP that HP will likely be marketing to acquire cash reserves for services- and software- related purchases. HP will be well-positioned to auction off its IP assets, which are now worth many times that of which HP purchased them for, while potentially retaining the ability to license out web OS to other PC manufacturers to provide additional revenue streams.
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