HP's Restructuring: What to Expect

PALO ALTO, Calif. ( TheStreet) -- The stakes are high for HP ( HPQ) CEO Leo Apotheker, who will reveal his long-term strategy for the tech giant next week. With HP's shares down almost 19% over the last 12 months, the new CEO must conjure up a road map capable of lifting the company's stock.

Up first, predict analysts: software as the next big item on Apotheker's to-do list. Software sales accounted for just 2% of HP's overall first-quarter revenue, compared to 25% at rival IBM, during its most recent quarterly report.

"At this point, HP's largest challenges relate to enterprise software, a point underlined by Apotheker's original hiring and the company's ongoing tussles with Oracle ( ORCL)," said Charles King, principal analyst at Pund-IT research, in an email to TheStreet. "Despite the financial benefits HP enjoyed under Mark Hurd, he left the company high and dry so far as business software assets are concerned, so on March 14, I would expect Apotheker to outline a workable plan for repairing those shortcomings."

More specifically, King said that Apotheker may unveil new solutions involving integrated hardware and software. The tech giant has already made moves into this space, recently ramping up its partnership with Microsoft ( MSFT) to launch pre-packaged bundles of hardware and software aimed at corporate customers looking to analyze their data.

Apotheker has also promised a major focus on cloud computing and connectivity.

"I believe that Apotheker has a software vision that will circle around cloud," said Jessica Breen, an analyst at Technology Business Research (TBR), in an email to TheStreet. "I expect that there will be a heavy emphasis on refreshing the software after lackluster performance."

There has also been speculation that Apotheker will bolster HP's OpenView systems management product, to better compete with IBM's Tivoli offering.

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Apotheker, however, would not address specifics when TheStreet asked about his plans during a recent conference call. "Software has been a credible part of HP's strategy to date -- it helps us differentiate our products," he said. "Make no mistake, we will also grow our standalone software business -- we will expose our IP as IP. At our March 14 event, will have ample opportunity to talk about that."

However, boosting the company's software revenue will require a major shift in HP's culture, said TBR analyst Breen.

"The biggest challenge facing Apotheker in terms of the future of the software business is teaching a hardware-centric company how to run a profitable software business -- and doing so without changing the company's business model," she explained. "HP runs a commodity business and competes on scale, not margins, which is the opposite of how software companies run."

HP will need to change its sales strategy, said Breen. "The HP messaging is still very complex and misleading," she told TheStreet. "Apotheker will need to weave the story of software into the marketing, and explain how the software pieces fit together."

One thing next week's meeting will likely not focus on: Hardware products, which were highlighted last month with the launch of HP's TouchPad and WebOS smartphone . "It is possible that HP may make some hardware and software announcement, but it is unlikely, and quite frankly, not important," said Kaushik Roy, an analyst at Wedbush Morgan. "March 14 will be about meeting the CEO in person and the strategy of the company moving forward."

In addition to Apotheker's software plans, Roy said that investors also want to hear how he can "bring back the innovation engine" to HP, as well as improve the company's services business.

"Most importantly, Leo needs to give out some metrics against which he can be measured," he added. "For instance, revenue and operating margin goals for the next year or two -- if HP doesn't give out some hard numbers against which Leo can be measured, investors may be a little disappointed."

Gleacher & Company analyst Brian Marshall agreed that new products and services are unlikely to be on the agenda, but expects Apotheker to explain how HP can boost its presence in existing markets and tap new ones.

"His biggest challenge? Getting his arms around the new businesses he has never dealt with before," explained Marshall. " This includes servers, networking, printers and computers."

--Written by James Rogers in New York.

>To follow the writer on Twitter, go to http://twitter.com/jamesjrogers.

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