 Live from the FIA Barcelona Grand Villa Compensator in Barcelona, Spain, it's The Cube at HP Discover Barcelona 2014 brought to you by headline sponsor HP. Here are your hosts, John Furrier and Dave Vellante. Top staff, top influencers are here talking about what's going on with HP and of course this is The Cube, our 50 year covering HP and 50 year in Barcelona with HP. We've been in Frankfurt, we've been in Vegas, obviously all the shows. I'm John Furrier, the host and my co-host is Dave Vellante with Wikibon.org and we're excited to be on the ground, get all the data, share that with you here on The Cube, our live format, the ESPN of tech as we call it but more importantly to talk to the guests, to get social, to get talking about the real issues and get into the data around HP. Dave, my co-host Dave, HP, certainly it's like a broken record for us every time we come out here. HP's on the turnaround and they're constantly trying to take the turns like a boat that's moving slowly and it just hits more waves of more turbulence as it goes along and Meg Whitman is moving as fast as she can and some critics are saying not fast enough, recent earnings are down and also the recent announcement since our last cube is the split of their PC and printer consumer business from the enterprise business, something that we were, I was critical of and now it seems that just the tide can't turn for HP to keep those two together. Dave, what's your take? I mean obviously HP still banging the drum, I mean we still see people really excited, it's like there's almost two versions of HP, the outside version, the inside version. I want to get your take. Well so John as you know we've been following this for quite some time and I have said over and over and over HP has to shrink in order to grow and to thrive and that's exactly what's happening. HP's revenue peaked in 2011 at $127 billion and the company in its last quarter fiscal year ended just recently in Q4 for the year did $112 billion so you can see it's down significantly. Now Meg Whitman is certainly talking about the decelerating rate of decline so those are my words not her words but they're shrinking more slowly than they were in the past and there are areas of growth and pockets of growth. The issue is those pockets of growth aren't enough to offset the declines in the historical business and I think if you look at HP's business breakout the break up that you talk about that's split which is essentially taking the PC and printer business the consumer low margin business splitting it off from the enterprise group is an inevitable occurrence. If you look at the compares with HP and some of its competitors and just look at the underlying profitability of those businesses there's a stark contrast. HP overall is about a 25% gross margin business even Dell had about a 21% gross margin business so HP and Dell were very comparable both companies provided end to end services when HP splits out Dell will be the only company left John that provides those end to end services and of course Dell thrives on very low gross margin business but let me give you some compares just to compare the fundamental business model as I say HP was 24% 24.6% gross margin Oracle who also sells hardware Oracle has an 80% gross margin business of course driven by Oracle software EMC largely a hardware company 62% gross margin again even though it owns you know VMware most of its revenue comes from hardware NetApp virtually a pure hardware company 63% gross margin IBM a decent compare to HP as 49% gross margin John Amazon has 29% gross margins higher than HP so this split between the consumer vision and the enterprise division really is a recognition of the inevitable there are two different businesses with two different business models and the question remains whether or not something that HP used to talk about that end to end capability which now Dell claims is it's the only company I don't know if anybody cares one of the things that we watch closely obviously is the making trends we've been on them since we started working together with SiliconANGLE and Wikibon and you know we've picked every winning trend there was out there you go back to Hadoop and big data and certainly hyperscale converged infrastructure and to me the next trend that we see happening is certainly around cloud and I think HP has recognized that and one of the things that we'll be teasing out is what's going on with HP in the cloud because obviously HP is one of those companies like IBM like Dell the old school including Microsoft in that as well kind of as an OEM software supplier that have to evolve and change and I think what's going on in the next mega trend is what Amazon is doing what Amazon has done is that they built from the ground up a fully integrated end-to-end platform for infrastructure to service and what they've enabled is for people to build the middleware required to stand that out now what this really does is disrupts the old incumbent markets of server vendors like HP and others who sold storage servers things in the silo so what's happening is is what Amazon is telegraphing in their success you mentioned gross margins but mostly in terms of now enterprise penetration is that the consumption of IT the consumption of technology is changing and that certainly is changing HP very dramatically and even five years ago when we started talking with these guys here in the cube you saw the shift clearly almost 180 degrees different it was hey we have server speeds and feeds we got all this great technology and we supply that now it's shifting to the data center conversations about integration how do i integrate all these different products together to solve business outcomes and ultimately the customers of HP care about certainly the cost to do that but more importantly to enable new applications the rise of the mobile infrastructure is one the cloud is changing security we're going to hear a lot about security here around perimeterless IT that means that the security models are no longer around securing the perimeter securing the DMZ or in the data center the old ways are changing HP has to evolve into an end-to-end platform for their customers to be a tool chest for success not a you know an inhibitor for them so to me Dave I think that's going to be fundamentally the signals that I'll be looking for on this trip is how much is HP changing around the data center customer their core base and certainly that migration to the cloud and everything that's affected by that whether it's big data software and or applications including and more importantly security yeah so John the when you talked earlier I talked about the split of the two companies HP's PC and printer business is about half of the revenue and the balance is obviously the enterprise hardware software and services I want to give you another little data point and underscore the importance that I've talked about a lot is the importance of HP software business HP software business in the quarter was just over a billion dollars that's out of about a 30 billion dollar business for the for the corner a little under 30 billion for HP so it's software business well it's very small throws off about 340 million profit or profit margin of about 31% operating profits no other HP business John can even touch that level of profit so an imperative for HP in my opinion is to increase the contribution from software we saw IBM do this you know decade and a half ago clearly it's benefiting Oracle you know the VMware contribution to EMC obviously helps a lot so companies large enterprise companies need to have greater software contributions we certainly talked about this in at Dell world a few weeks ago and you're also seeing Amazon while it's not considered a big software player it's really an infrastructure player but trying to replicate software like margin models at volume so their marginal cost structure is very very strong I wrote about this recently so the point is the HP's got to do more there so what are its software assets really the two growth areas for HP software are Vertica which grew in the high double digits and security which came from a number of acquisitions HP as an arc site product and other security capabilities which are quite strong so those are growth areas for HP but again John they're they're very small now the autonomy piece of the business HP is trying to shift that to a SAS model you wrote about this recently and so you know HP's in this Meg Whitman calls it a non-linear turnaround transitions and turnarounds tend to be non-linear it clearly this turnaround is non-linear last point I want to make is what's the ultimate judge of a turnaround how the company's doing the stock market so since Meg Whitman came on there's the stock is up 70% and in the past 12 months it's up 41% so that's a pretty good indicator that the street sees that the turnaround is working and we can talk more about why but I think John there's a lot of upside to go I mean HP is still not where it needs to be yeah I mean obviously HP has a lot of market power in terms of their balance sheet and cash and they do a lot of revenue the question is how much of that's profit and I think that the printer challenge has been a focus issue and a cultural issue in order for HP to win the battleground in the enterprise their core business they have to have a dedicated focus on that that's about organic development of products and also being free from the debt to do opposition so you know clearly there's a lot of opportunities HP has from an M&A standpoint on the enterprise side but also the cash cow of the consumer business if pushed out on the side could work well look what would IBM has done with Lenovo I think HP looks at that success and says hey let's shed that business out as a separate entity so they could be highly cohesive and decouple that execution risk from the enterprise it allows them to focus their resources and keep their people motivated and you know I think that's the real opportunity for them is to really kind of navigate the waters of both the inflection point and the shift that's going on and I think fundamentally that is what's happening in this market for from what I'm talking to customers that's the number one thing that comes up is that in this time in history of the computer industry now I don't know if we're going through an inflection point and shift at the same time sorry I don't know if there's a flip side to that that's split and I honestly don't know the answer to this but something I want to find out what we're here is is there a supply chain impact you know they don't talk about it much anymore but remember when Dave Donnell used to come on he talked about a 60 billion dollar supply chain that HP had when IBM spun off its sold its PC business it lost that supply chain advantage it lost even more of it with its x86 sale to Lenovo I don't know I guess the structure of HP is Maggie's still the chairman of both companies right so there's still sort of one entity with two tracking stocks I guess so I think I presume they can still have supply chain leverage but I don't know the answer to that and if they can't that's going to have a profitability impact but to your point they're going to be more focused if you look at the the cash cows of the business it's printers and it's and it's the enterprise the business both of those throw off over a billion dollars a quarter in profits and so so the interesting wildcard here John is nobody predicted that the PC market was going to grow this year the revenues in the PC market grew about 4% and what happened at companies like certainly Dell and HP is they had baseline their cost structure all of a sudden the revenues go up that dropped right to the bottom line and hit both companies with free cash flow you know HP is is doing very well from a cash flow standpoint it still has a lot of debt so it's net cash position if you know in other words you take the cash on the balance sheet and subtract out the long-term debt it's actually you know basically zero net cash I mean HP has a resource there's no doubt about it certainly the debt is a problem that's going to inhibit their M&A but you know I think they're going to free that up but the thing that I look at with HP is they have the resources they have the team they have the people the question is can they put the team together it's kind of like you know the Yankees and if they're not winning anymore but they have the highest payroll and this what they have to do is get the get the players on the field get them focused get them on the execution plan that they need to be successful and recognize product gaps and put the M&A in place do the tuck-unders go out to the marketplace buy where you can't organically move fast enough and put the product portfolio together and it's clearly going to be the battleground in my opinion will be the cloud software to service is how customers are going to be rolling out their their their solutions and I think if HP wants to be part of that and the data center going forward up the stack they need to be focused that way so I'm excited this week Dave a couple other things I want to share with the audience is that we're going to add a new element to the cube this year include some influencers out there that are watching on crowd chat we have Tim Crawford who's online hey Tim how are you good to see you again Tim Crawford is always on crowd chat and uh and participating he's actually here at the event we're going to go out and try to get the influences who are here on the ground to get the questions into the cube and if you're watching go to crowdchat.net slash hp discover we'll field your questions talk to you guys and and ask the guests the same question um Tim Tim asks some talk about security on crowd chat uh great point when I brought up premium security he says you know um what's the current state or future state are they connecting the dots between the current and future state of security that's a good question we'll ask their top guys that question do they have situational awareness for their customers are they enabling that what solutions are they putting in place for threats and and breaches a very big very big point and also you know Tim makes a good point here if hp moves more to software and services doesn't that limit the supply chain argument and key for that any position yeah that's really the point I was making is is are they losing supply chain leverage by by splitting the the company up I don't know the answer to that they very well may be although it's a different if the different structure that certainly that IBM sold off its pc division so they still own that so I would think if I'm a if I'm a an hp buyer internally and I've got you know suppliers I'm going to squeeze them just like I used to I don't know I mean to me it's a competitive strategy question I think supply chain Tim's point and Jeff Rick points out as well a lot of power on the supply chain I think hp can use that as leverage to put together the formula for success they should be leveraging their strengths downplaying their weaknesses get the product gaps filled and we'll see what happens Dave so I think ultimately you know the the the jury's still out on hp I'll see this headroom in the stock obviously look at their execution they're getting pounded on wall street and with the earnings miss you mentioned they will bump up but I think ultimately the execution will will will tell the story yeah that earnings miss is interesting I mean it was mixed you know a lot of people interpret it as an earnings mix but I interpreted it as an earnings miss but I interpret it as actually a missed quarter because there was good news and bad news in there the good news is as I said the the rate of decline is slowing okay I know that's great news but it's progress the other good news in there is cash so hp has has laid out use of use of think about use of cash it's laid out about a billion dollars in the past year in stock buybacks and dividend payments now it's funny two years ago I was talking to Meg Whitman at one of the analyst meetings and we were talking about you know different companies and competitors she said you know IBM is really just doing a lot of financial engineering to keep its stock price up and I said yeah it would be nice if you could do some of that and that's exactly what's happening now is that throwing off some cash hp's doing buybacks they're they're paying dividends and that's helping the stock price that's what you can do with cash you can buy companies you can buy back stock and you can financially engineer I wanted to make another point you brought up cloud hp doesn't really explicitly break out its cloud business it talks about it talks about its products but unlike oracle I have to give oracle props here I am very critical of oracle frequently but I have to give them props on they lay out their cloud business infrastructures of service platforms of service and softwares of service they tell us each quarter how big the revenue is how fast it's growing now you can you can criticize oracle say oh they're throwing everything in the kitchen sink in the cloud like Microsoft does but generally speaking this is real rental revenue so I give oracle props for that I want to see that out of out of hp I want to see more transparency in cloud love to see more transparency from amazon on cloud you know IBM gives guidance but again not as crisp as oracle so that's something to watch here because essentially john that enterprise business that that throws off a billion dollars in profit every quarter that's going to cloud you know jay one of the things that's highlighting here and I want to get your thoughts on what you're looking for over the next three days as we broadcast live from Europe and Barcelona here for hp discover what you're looking for but I want to just say one thing that's coming out clear in the early releases I've got the embargo of all the news and stuff is the channel strategy you're seeing hp coming out I think what you'll see over the next couple days is a real emphasis around services and you know the tim proffer's point about supply chain brings the question of the supply chain being a manufacturing concept to more of a service delivery concept so I think what you're going to see from hp is really leveraging of this channel and supply chain I misunderstood his point by the way his point was if they move more towards my point that they move more towards software and services doesn't that limit the supply chain argument well yes and no right if they still got a big supply chain they can look at what amazon's done they get their own supply chain so they can offer that solution but I guess my point is I would take the 80% 90% gross margin business over the supply chain leverage any day as I guess my well depends how you define supply chain to my point and the crowd captain waited on that as well but I think they still have a 60 billion dollar supply chain I don't know the answer to that when they split but I gotta believe they still can leverage that supply chain well I mean look at if everyone is going to like if amazon is an indicator of where the market's going they're building their own box I think hp's laid business point here from Chuck Smith one of our first guests up talk about that you're seeing the supply chain could be very powerful in the higher end servers that's where IBM is also going after the market you're seeing the high-end servers what used to be called mission critical are now becoming the table stakes for the entry level servers and I think that's where the action will be not every enterprise can go out and buy their own white label boxes but could get a little bit of open compute and do some real footprint work around their data center that is enabled for cloud I think that will be a big thing so let's talk more about cloud I mean you were at at reinvent I didn't make it this year but a lot of momentum coming out of that show where do you let's lay out the horses on the track you know the cloud players I mean obviously Amazon is the the gold standard everybody likes to say oh you look at the surveys small portion of the world is moving workloads to public cloud but you go to reinvent a lot of people moving workloads to the public cloud what's your take on the cloud well my take on the you know I'm really bullish on amazon so you know I'm biased here so I'm a big fan I'm an amazon fan boy so disclose that right up front I love what amazon's doing I think what amazon has done is will be viewed as a historic moment in history of the computer industry they are doing what Andy Chastain his team is doing is there they have completely changed the game they were a misunderstood opportunity people still don't understand the black box at amazon I do you do we've dug in there they are absolutely taking advantage of the inflection point in the market and the shift and the shift is dollars in the enterprise and how people are moving workloads into a good economics so what they're doing is innovating and driving cost down that to me is a fundamental shift where the notion of a platform will be commoditized down to to uh just commodity levels and I think the big battleground that amazon is fighting and you're seeing as a telltale of what will be happening over the next five years is the tooling and the packaging of the services will be with a game is won and lost I think HP gave has to have a platform that is as large scale as amazon but yet fits tailor made to their customer requirements which is on premise and in the cloud so I think what amazon is showing I think the world and if HP's paying attention they should see this is that you could have to have your own cloud I think people were saying I don't want to buy into HP's cloud so and so HP has to have their own cloud I talked to some of the top venture capitalists in silicon valley and the word on the street is they they don't trust amazon because they don't know where amazon is going to go and they don't know what and what cards are amazons holding they tell us that they love open stack ventures that they're going to fund open stack because open stack is more predictable and I think that's where you're going to start to see the lines in the sand drawn how how much does HP continue to drive open stack and what do they take on the table for themselves in this middleware environment that to me is fundamentally where the cloud action is going to happen and we'll see what the top guys here say in the cloud group Dave so again cloud is just the big lever in the market HP's got a lot of stuff wrapping around security applications and a lot of other services so we'll see what it takes and we're going to get to it this is the cube we're live here in Barcelona for HP Discover Europe 2014 is the cube I'm John Furrier with Dave Vellante join the conversation at crowdchat.net slash HP Discover we'll look for your questions and we'll be right back with our next guest after the short break