There are a couple problems I have with HP.In my experience, their "go to market" is inefficient. They don't have or encourage loyalty in their channel. Their channel partners are typically reduced to commodity brokers working on skinny margins and there is the ever present - and quite real - threat that HP will just take the deal directly for themselves if it's large enough. Channel partners are a sales multiplier, dramatically increasing the number of feet on the street evangelizing your products and finding new opportunities. Having a poor relationship with the channel cuts you off from that multiplier. While you're on top and the only game in town, resellers will still sell your product. Once they find a higher margin alternative however, look out.Furthermore, their direct account coverage model is completely broken. They have a sales teams responsible for x86 servers, another one for storage, another one for UNIX servers, another one for networking, another one for services, etc, etc, etc. None of these teams are paid on the activity of the other teams and have no incentive to cooperate. There is not single point of contact for customers to call or to develop relationships with. This structure causes HP to miss opportunities, to confuse customers, and to struggle to articulate an architectural message. It makes them very weak as you climb the stack into the C suite and makes them vulnerable to competitors getting a foothold in their accounts.Additionally, recent comments by Apothekar make me wonder if he's out of touch. Cisco announced they have achieved a $650M annual run rate in X86 servers. Apothekar said he never sees them and they must be selling the servers on planet Zircon. Granted $650M is only a small fraction of the overall X86 server market, but it's still $650M in lost HP revenue. I would expect him to take it more seriously. A recent article in the WSJ said Apothekar recently released guidance to his sales teams that he wouldn't accept anymore negative margin deals this quarter since margins need to be the focus. If negative margin deals are so prevalent that you need to make a special rule about them, that's a problem. I can see accepting a loss on a strategic project or on one aspect of a particular customer's spend in order to lock out a competitor and protect margins elsewhere, but not across such a wide spectrum of projects that the CEO has to call it out.I think they are also dealing with the legacy of Mark Hurd. He all but killed R&D while he was CEO to boost margins. That works in the short term, but in the longer term it leaves the company out of position and exposed to more strategically minded competitors. Apothekar promised to boost R&D spending when he took over, but the realities of HP's revenue and margin position made that very challenging and he hasn't been able to pull it off yet.The sense I get from HP is that they are a company in search of a direction. As they cast around for the right mix of product and services and the right go to market strategy, I think they'll struggle to deliver consistent results. A P/E of 7.5 is pretty attractive if you assume the $5/shr in earnings is a solid estimate. I'm not sure how they sustain that over the next couple years given that they want to boost R&D spending and assuming they still try to pursue all the markets they are currently chasing - including the ones that rely on negative margins.Steve
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