HP's New Soft Spot for Software

Having surpassed Dell in PCs, Hewlett-Packard sees the future in software—and is taking aim at Big Blue

by Aaron Ricadela

Hewlett-Packard's $1.3 billion software business swung to an $85 million profit last year, from a $49 million loss a year earlier. That's just the warm-up. Within two years, HP says it can reach $2 billion in sales and triple profits.

It plans to do that by snapping up more companies and retooling its sales force to package combinations of servers, software, and consulting services. The bigger aim isn't just bolstering results but also taking on IBM (IBM) as a key supplier of business software. "Software is key to differentiating our hardware and differentiating our services," says Shane Robison, HP's executive vice-president and chief strategy and technology officer. "Software is important across the board.…The one company we're focused on as a competitor is IBM."

Acquisitions

The latest arrow in HP's quiver is PolyServe, purchased on Feb. 26 for an undisclosed amount. PolyServe's software can improve the performance of database software used in conjunction with power-efficient blade servers. HP (HPQ) holds nearly 42% of the market for blades, which yield more profits than standard servers based on Intel (INTC) chips, and it wants to widen its lead.

On Feb. 5, HP scooped up Bristol Technology, whose software helps companies assign multistep operations like processing insurance claims and ordering products with the computer systems best equipped to handle them. On Dec. 20, the company bought Bitfone, which makes software for updating companies' PDAs and cell phones with new applications. Next up could be a software maker that specializes in identifying trends from massive volumes of data. A prime candidate, analysts say, is Teradata, the NCR Corp. (NCR) unit that's positioned for a spinout.

In a panel discussion at a venture capital conference in San Francisco on Feb. 27, Robison said chief information officers are more concerned these days with squeezing efficiency out of their fleets of servers, PCs, and cell phones than in buying machines that sport the latest microprocessor. HP's software portfolio could help. "We have a whole new area we can focus R&D," he said.

Higher Margins

HP is trying to use its considerable software investments to sell more high-margin products in areas such as blade servers, data analysis systems, and consulting services aimed at making corporate computer centers more efficient. In an IT market in which companies are getting maxed out on equipment, software can provide an entrée to new sales. The software push comes as HP Chief Executive Mark Hurd looks for growth from mobile computing, data-center management, and new kinds of printing services, while continuing to pare costs (see BusinessWeek.com, 12/13/06, "The Cuts Aren't Over at HP").

HP could keep top-line growth and profit margins climbing by selling customers software for automating tasks in data centers, ferrying computing workloads to the right machines, and crunching the numbers for their sales and operations—and packaging it all with hardware and consulting. "These software products are the leading indicator for sales in other parts of HP," says Stuart Williams, a senior analyst at consulting company Technology Business Research. "This is if you buy the whole kit and caboodle from HP."

If HP's software gamble pays off, it could help the company meet Wall Street expectations that it can add to profits and increase sales to $104 billion in 2008, vs. $91.7 billion last year.