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HP halts WebOS business, spins off PC unit

Hewlett-Packard says it will discontinue its WebOS operations, including its TouchPad tablet, as the company cuts its outlook for the next two quarters.

6 min read

Jon Rubinstein introduces the HP TouchPad, a WebOS-based tablet.
Jon Rubinstein introduces the HP TouchPad, a WebOS-based tablet, in February 2011. James Martin/CNET

HP said today it will discontinue its WebOS operations as the company cut its outlook for the next two quarters. The company will also acquire Autonomy, an enterprise information retrieval outfit.

The company said it will discontinue operations for WebOS devices, specifically the TouchPad and WebOS phones. In April 2010, HP talked about doubling down on Palm and the WebOS. And that WebOS unit will cost HP some dough to discontinue. HP will also spin off its PC unit.

HP said that it will take a hit to fiscal 2011 earnings of $1.16 a share to $1.23 a share as it restructures and shuts down WebOS devices and related operations. There were signs that TouchPad sales were bleak, but a complete shutdown of WebOS operations was unexpected.

HP's statement held a bevy of items for customers and shareholders to ponder. First, HP's customers--and anyone who bought a TouchPad--wonder what the potential sale or discontinuation of the unit will mean. Shareholders have to consider the spinoff of the PC unit as well as a lower-than-expected outlook for the rest of the year. On a conference call with analysts, HP CEO Leo Apotheker said:

Transformation can involve difficult decisions, but we take these steps to better position for the future. These challenges and the transformation we are undertaking will take several quarters to fully resolve. I don't take this action lightly. I know our investors don't like being in this position and neither do I. I feel that as CEO I believe in transparency about what we are facing and be clear under the size of things we are doing now about it. To conclude, I'm taking ownership for these decisions and investments with a focus on driving actions that deliver value for shareholders as we shape the new HP.

HP said that its third-quarter revenue will be $31.2 billion with earnings of 93 cents a share. Non-GAAP earnings will be $1.10 a share. Wall Street was looking for earnings of $1.09 a share on revenue of $31.17 billion.

Overall, the third-quarter results were the least of HP's worries. The company said its fourth-quarter revenue will be $32.1 billion to $32.5 billion. Non-GAAP earnings will be $1.12 a share to $1.16 a share. Wall Street was looking for $1.31 a share on revenue of $33.99 billion.

The guidance indicates that HP is seeing material weakness and having a tougher time navigating economic uncertainty relative to rivals like Dell. HP also confirmed that it is in talks to buy software maker Autonomy, which is based in the U.K.

Remaking HP
HP's move to shed the PC business as well as discontinue the TouchPad has its risks. For starters, HP will take a reputation hit for launching a TouchPad and then killing it.

In a statement, HP said it will seek "strategic alternatives" for its Personal Systems Group (PSG), including a full or partial spinoff.

The real kicker is that HP is going to discontinue its WebOS phones. It will "continue to explore options to optimize the value of WebOS software going forward."

There are two ways to look at HP's moves today. On one hand, HP is making bold moves before the PC and WebOS operations become an anchor for the company. On the other, HP's business is struggling and it has disappointed Wall Street since the end of Mark Hurd's tenure.

Meanwhile, a bevy of IT insiders have questioned HP's potential Autonomy acquisition. HP said that it will acquire Autonomy for $42 a share in cash, or $10 billion.

Apotheker said that the acquisition of Autonomy represents a shift into higher-margin businesses. HP is now positioning itself as an information management company. Apotheker took heat from analysts over the Autonomy price tag. Apotheker said:

"Autonomy represents an opportunity for HP for us to accelerate our vision to decisively and profitably lead a larger win space which is the enterprise information management space," Apotheker said.

Add it up and HP is aiming to exit the consumer business--or at least quarantine those operations--to focus on the more lucrative software, systems, and services business. If HP is successful, it will look more like IBM when finished. The problem for HP is that IBM is firing on all cylinders. The consumer unit--whether it's shed, sold, or spun off--will be left to battle Apple.

HP shares took a hit in regular and extended-hour trading.

HP said its fiscal 2011 revenue will be in the $127.2 billion to $127.6 billion range. That's down from the previous sales range of $129 billion to $130 billion. Non-GAAP earnings will be $4.82 a share to $4.86 a share. That range is down from at least $5 a share. GAAP earnings for fiscal 2011 will be $3.59 to $3.70 a share.

Wall Street was looking for fiscal 2011 earnings of $5.01 a share on revenue of $129.1 billion.

Those non-GAAP earnings exclude charges related to exiting the WebOS operations.

Hewlett-Packard revenue breakdown

Business unit results
HP's business group results highlight the strain of the consumer business. HP's services revenue was up 4 percent; the enterprise server, storage, and networking unit saw sales gains of 7 percent for the quarter. Meanwhile, software revenue jumped 20 percent from a year ago.

However, HP's personal systems group had a revenue decline of 1 percent, and imaging and printing also fell at the same clip.

Based on the business unit results, HP's PC unit held up well and delivered $567 million in operating income.

HP revenue by business unit

FUD time
As HP goes through this transition, it will face a fear, uncertainty, and doubt (FUD) war with its rivals. HP is fighting a multifront war. On the enterprise side, Cisco, IBM, Dell, and Oracle are chief rivals. On the consumer side, HP faces Apple and Google's Android army.

Michael Dell, CEO of Dell, kicked off the festivities quickly.

Here's his tweet:

Michael Dell's tweet: If HP spins off their PC business...maybe they'll call it Compaq?
Twitter; screenshot by Larry Dignan/ZDNet

Competitors are likely to take aim at HP on multiple fronts and portray the company as distracted. Look for IBM and Dell to target HP's server position. Cisco will look for retribution after quarters of HP targeting the networking giant's core switch products. On the corporate PC side of the equation, Lenovo and Dell will aim for a bigger chunk of the upgrade cycle.

Separately, HP named a new head for its enterprise services unit. John Visentin will lead the HP Enterprise Services unit.

On the consumer side, the reputation hit to HP can't be underestimated. HP will have to smooth over relationships with retail partners, resellers, and consumers who may have taken the TouchPad plunge. On the software side, HP's hasty retreat on WebOS will be remembered by developers. These developers are likely to be skeptical about HP's commitment to other efforts such as the public cloud.

Bottom line: consumers and corporations will have doubts about HP and its intentions amid a potential spinoff of the PC business.

Questions abound
Going forward, HP will have to face multiple questions. Among the larger questions:

  • How much time will CEO Leo Apotheker really have to pull off his Lou Gerstner imitation? Gerstner ditched IBM's low-margin businesses and remade the company, but that process took nearly a decade.
  • What market share hit will HP see in PCs?
  • Will concerns about distractions bleed over into HP's core enterprise business?
  • What will happen to HP's plans revolving around cloud computing?
  • Will buyers emerge for the PC unit?
  • And what's the future of the WebOS going forward? Can a company buy it and make something of the operating system?

This story initially appeared on ZDNet's Between the Lines.

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WebOS goes down in quiet death
What will HP do with its PC business?
WebOS chief: Don't fret over TouchPad reviews
HP's Apotheker recounts TouchPad disaster in post mortem

Correction at 1:15 p.m.: This story initially reported an incorrect figure for HP's non-GAAP earnings for the third quarter. They are $1.10 a share.