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SAN
FRANCISCO—Hewlett-Packard Co. chief executive officer
Mark Hurd, who revived the company by outselling Dell
Inc. in personal computers, is close to a payoff in a
more-lucrative product: software.
Hurd
sliced more than $3 billion in costs to undercut Dell on
PC prices even as he poured $6.5 billion into software
acquisitions. He nabbed his sixth company last September
in two years after winning a bidding war for Opsware
Inc., the software maker started by Internet pioneer
Marc Andreessen.
The
spending, and Hurd’s decision in 2005 to stop giving
programs away to computer buyers, may help triple profit
in software to $253 million this year. Software, a
money-losing unit when Hurd took over in April 2005,
delivered a higher profit margin than the printing unit
for the first time last quarter.
“We’ve
just seen the tip of the iceberg here in terms of what
the software business can become,’’ says UBS AG’s
Benjamin Reitzes, ranked the second-best computer
analyst by Institutional Investor magazine. He rates the
shares “buy.’’ “It’s still a little small, but there’s
the potential.’’
Software, though only 2.2 percent of revenue, is the
Palo Alto, California-based company’s fastest-growing
division. RBC Capital Markets analyst Thomas Curlin says
Hurd may make a bid for BEA Systems Inc., the maker of
programs that connect server computers and the subject
of a $6.7-billion hostile offer from software company
Oracle Corp. Hewlett-Packard and San Jose,
California-based BEA declined to comment.
Hurd’s
takeovers brought Hewlett-Packard, the world’s biggest
PC and printer maker, a new title last year:
sixth-largest software maker after No. 1 Microsoft Corp.
and No. 2 International Business Machines Corp.
Hewlett-Packard, which also trails fifth-ranked Symantec
Corp., now spends more of its research budget on
software than hardware.
Even
enthusiastic investors say Hurd faces risks.
“They
are late to the game,’’ says Chuck Jones, who helps
oversee $17 billion, including Hewlett-Packard shares,
at Atlantic Trust Private Wealth Management in San
Francisco. “They’ve paid at the high end of valuations
and they have to put together multiple software
companies, technology bases and divergent employees,
especially on the engineering side.’’
Hewlett-Packard’s biggest buy was the $4.5-billion
purchase in 2006 of Mercury Interactive Corp., the top
seller of software that tests programming code.
More
acquisitions are coming, says Tom Hogan, recruited from
Vignette Corp. in February 2006 to find deals and run
the software group. “My view is go bigger,’’ he says.
“Build it yourself if you can; if you can’t, go get the
market leader and don’t mess around.’’
After
deciding it would take 18 months to copy Opsware’s
technology for managing data centers, Hewlett-Packard
beat nine suitors by offering $14.25 a share, or $1.6
billion. The bid was 39 percent more than Opsware’s
$10.28 stock price on July 20.
Software
may help Hurd cushion earnings as PC makers Acer Inc.
and Lenovo Group Ltd. cut prices to lure buyers and as
Hewlett-Packard trims printer prices to widen its lead
over Lexmark International Inc.
Profit
from software may jump from $85 million in 2006 and
reach $497 million next year, according to Credit Suisse
analyst Robert Semple in New York. Sales may rise 65
percent to $2.14 billion in the year ending this month.
Before
the purchases, Hewlett-Packard trailed rival IBM in
offering software to improve security, test systems and
manage servers that run networks and web sites.
If Hurd,
50, can wrest customers from IBM and digest his
takeovers, software can return profit margins of 20
percent or more, analysts say. That tops the 5.8 percent
to 16 percent Hurd culled from the PCs, printers and
servers that make up most of Hewlett-Packard’s earnings.
“Hurd’s
strategy to move aggressively into software appears to
me to be on target,’’ says Stanley Nabi, vice chairman
of Silvercrest Asset Management Group, which owns 1.1
million Hewlett-Packard shares. “If IBM had not moved
into software and services over the past 15 years or so,
it would very likely not be in existence today.’’
Software
is typically more profitable than hardware, which
prompted IBM to build up that product line in the past
decade, UBS’s Reitzes says. Software makers do most of
their spending on the initial development, updating
programs for little cost while charging a premium for
their products. Hardware makers’ manufacturing costs
usually stay fixed.
Hurd,
who ran the database software unit at automated teller
machine maker NCR Corp., is focusing on software to
manage storage devices, servers and data centers.
Customers are spending to simplify operations and
protect files from hackers.
By
October 2008, Hurd says, Hewlett-Packard’s revenue will
rise 4 percent to 6 percent, after topping $100 billion
this year. Sales of printers and PCs will gain 4 percent
to 6 percent.
For
software, Hurd has promised a 10-percent to 15 percent-
jump in sales and margins of 18 percent to 22 percent,
more than four times the margin forecast for the PC
division. |
