|HP CEO Meg Whitman|
PALO ALTO, Calif. ( TheStreet) - New HP ( HPQ) CEO Meg Whitman's decision to keep the company's PC division has won plaudits on Wall Street, although analysts warn that there's plenty to do before the tech giant truly gets back on track. "This is the first major decision that new CEO Meg Whitman has made and, we believe, the correct one," explained Shaw Wu, an analyst at Sterne Agee, in a note. "The reality is that the PC business is an essential part of HP in running its overall business."
HP's Personal Systems Group (PSG) accounts for around a third of the company's total revenue and, within enterprises, serves as a vital 'foot in the door', for the tech giant to sell additional technology. PCs are such a core part of HP's identity that getting rid of PSG would have been like disemboweling the company. The possible PC spinoff thus sent HP's shares into a tailspin when it was announced by former CEO Leo Apotheker earlier this year, and contributed greatly to his ouster last month. Sure, margins may be under pressure in the PC market, but the risk of extracting one of HP's vital organs was way too dangerous. "Meg Whitman's first strategic move as CEO is encouraging," added Bill Shope, an analyst at Goldman Sachs ( GS), in a note. "We have noted for some time that we felt that it would be difficult for HP to spinoff its PC business without having a negative impact on its Enterprise Storage, Servers and Networking (ESSN) segment -- HP has a tightly integrated supply chain across multiple divisions, and we believe a PC spinoff would have had negative impacts on the company's growth and cost structure." Still, though, Whitman has plenty of work to do getting HP back on track, not the least of which is repairing the damage done by the PC spinoff snafu. After a period of massive uncertainty, the CEO must now win hearts and minds amongst PC partners and customers. "We believe HP inflicted some unnecessary damage on itself by creating uncertainty with corporate buyers, channel partners and possibly consumers," explained Jayson Noland, an analyst at R.W. Baird. "We believe confidence will be restored over the next couple of quarters but not without some expense, for example, a large brand campaign, buyer concessions."
Strategically, there are also major long-term question marks hanging over HP. In particular, Whitman needs to crank up the innovation engine. One of Silicon Valley's original trailblazers, HP has been criticized for falling behind the likes of Apple ( AAPL) over the last decade. "The longer-term challenge for HP is
to drive growth in its PC business," notes Sterne Agee's Wu. "Obviously, an improvement in the macroeconomic environment would help, but HP needs to drive more innovation and create products that customers desire." HP's attempts to drive innovation should include the critically-acclaimed WebOS mobile operating system, according to Wu. The raft of controversial changes announced by Apotheker in August included ditching hardware based on WebOS, spelling the end for HP's TouchPad tablet. The Palo Alto, Calif.-based company should, however, rethink its WebOS strategy, says the analyst, echoing concerns that HP is relinquishing one of the most potent weapons in its arsenal. "While it may be costly, we believe HP should at least give its WebOS operating system a fairer chance at success before deciding to pull the plug," he explained. "The alternative the company should also seriously consider is to sell WebOS to a leading mobile device maker like Samsung, HTC, or Amazon ( AMZN), who may make better use of the technology." HP's chairman Ray Lane has already said that the company can make money out of WebOS by licensing it out to third parties, although precise details on the future of the technology have not yet been revealed. Boosting HP's business around high-margin areas such as software and services, is another huge challenge, with HP desperate to emulate the success of arch-rival IBM ( IBM). The $11 billion purchase of U.K. data analytics software specialist Autonomy will play a part in this effort, although the new CEO must also make sense of Apotheker's somewhat muddled strategy around cloud services and connectivity. Critics of HP's latest move warn that it will be even more difficult for Whitman to boost margins with the PC business in tow. "We don't view this decision to keep PSG positively for HP," notes Brian White, an analyst for Ticonderoga Securities. "We believe the company would do better for shareholders to focus its efforts on enterprise initiatives that play into secular trends in the data center such as cloud computing." Shares of HP, which have tumbled more than 23% over the last three months, gained 59 cents, or 2.19%, to $27.58 on Friday. -- Written by James Rogers in New York. >To follow the writer on Twitter, go to http://twitter.com/jamesjrogers. >To submit a news tip, send an email to: firstname.lastname@example.org.