HP files Form 10: Reveals possible channel setbacks

HP has taken a significant step towards a split, by filing to make HP Enterprise an independent company

Hewlett-Packard has filed the paperwork to register HP Enterprise as an independent company - an important milestone on the road to a split.

The initial Registration Statement, known as Form 10 in the US, was filed yesterday with the Securities and Exchange Commission (SEC).

"Today, I'm more convinced than ever that this separation will create two compelling companies well positioned to win in the marketplace and to drive value for our stockholders," said Meg Whitman, chairman, president and CEO of HP. "Since we announced our plan to separate in October, we've made significant progress and remain on track to complete the separation by the end of the fiscal year 2015."

HP has been working hard for several years to build trust around its PartnerOne programme. Back in 2013, the tech giant made sweeping changes and a significant investment into the reworking of the programme, with the aim of simplifying its rebate structure and certifications.

Feedback from partners since the changes has been largely positive. But as the split becomes less of a dot on the horizon and more of a 16-wheel juggernaut, heading straight towards the channel, partners are getting ever more antsy about where all of the pieces might land. Will all of HP’s hard work be undone?

While the Form 10 filing doesn’t directly address many of the concerns that partners have, it does give some interesting insight into the potential hurdles that the new company might face in the channel. The filing makes clear that a strong channel will be a vital component of the company’s overall success.

“If we fail to manage the distribution of our products and services properly, our business and financial performance could suffer,” the filing reads. “Successfully managing the interaction of our direct and indirect channel efforts to reach various potential customer segments for our products and services is a complex process. Moreover, since each distribution method has distinct risks and gross margins, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue and gross margins and therefore our profitability.”

To many, HP Enterprise’s reliance on the channel may be seen as something of a blessing and a curse. The filing revealed that the ten largest distributor and reseller’s in North America and Europe collectively represented approximately 12% and 8% of gross accounts receivable in 2014 and 2013, respectively. While that is a hefty chunk of overall sales, the document also pointed out that no single partner accounted for more than 10% of gross accounts receivable. Should any of the circumstances mentioned arise, the diversity of HP’s channel ecosystem should mitigate risk to a certain degree.

HP also highlighted potential snags with inventory management.

“We must manage both owned and channel inventory effectively, particularly with respect to sales to distributors, which involves forecasting demand and pricing challenges,” the document continues. “Distributors may increase orders during periods of product shortages, cancel orders if their inventory is too high or delay orders in anticipation of new products [..] Our reliance upon indirect distribution methods may reduce our visibility into demand and pricing trends and issues, and therefore make forecasting more difficult.“

“Moreover, our use of indirect distribution channels may limit our willingness or ability to adjust prices quickly and otherwise to respond to pricing changes by competitors. We also may have limited ability to estimate future product rebate redemptions in order to price our products effectively.”

While the filing is an important step, the split still has a series of obstacles to overcome – namely obtaining final approval from the HP Board of Directors, and an auspicious tax ruling from the IRS.

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