HP Doesn't Want to be IBM

PALO ALTO, Calif. ( TheStreet) - HP ( HPQ) has big plans to bolster its software business, but has no desire to mirror rival IBM ( IBM), according to Mark Potts, CTO of HP Software.

"Whereas I think, before, the perception on Wall Street was that we were going to become a software-and-services-only play à la IBM's transformation, what we're going to be is a hardware company that differentiates through the combination of hardware, software and services," he explained, during an interview with TheStreet. " This will be for specific solutions in our customer base."
HP has big plans to grow software revenue.

With HP in the throes of a major restructuring, there has been a lot of talk that the no.1 PC maker is desperate to emulate IBM, which successfully shifted its focus from low-margin hardware to high-margin software and services.

Potts, though, is keen to emphasize core differences between the two companies. "IBM has done a phenomenal job, but I think they have a strategy that's very different from HP's," he said. "We are primarily a hardware business, with software and services -- they are primarily a services company that has software, and has some hardware."

The CTO said that, unlike its rival, HP will not be undertaking large-scale business process re-engineering, unless there's a lot of IT involved in the project. "You will see us very focused on what it means to deliver great IT solutions for the business, rather than transforming the business that might use IT solutions," he noted.

Critics have derided HP's 'limited' software portfolio, although the no.1 PC maker has made a number of acquisitions to improve its software story, such as the surprise $10.3 billion purchase of U.K. firm Autonomy.

HP CEO Meg Whitman, who took over from the ousted Leo Apotheker last year, has outlined a bold goal for the company's software business. Late last year Whitman told the German newspaper Frankfurter Allgemeine Zeitung that she wants to double or triple the company's software sales.

HP, however, has not given a timeline for achieving this target. Potts explained that software growth will be fueled by trends such as big data, which is managing large volumes of unstructured data, and cloud computing. These technology areas, though, are evolving at different paces, he said.

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"They are on a maturity and adoption into the customer base that's going to be different," he told TheStreet. "We're in the middle of the hype cycle on cloud and there's a lot of perceived need and want out there, but the reality of it is that people are going to take some longer periods to adopt it."

Potts pointed to HP's public cloud beta as evidence of its cloud commitment. "HP has stood up as a public cloud infrastructure -- we have offered that as a private beta to a set of existing customers that are testing that out," he said. "There will be further announcements this year about when we go to full GA general availability and open that up."

Public clouds typically involve customers accessing services such as storage and server power from third-party companies, whereas private clouds are often run at customers' own sites. Private clouds could be used, for example, to provide company-wide marketing or HR services across multiple locations.

The CTO, though, refutes the suggestion that HP is late to the cloud market. "I don't think that we're new into cloud -- I think that the public part of it is fairly new," he said. "When you talk about enterprises or service providers, we have engaged with an awful lot of companies around building out private and managed private cloud."

HP touts a host of offerings for the cloud market, such as software for provisioning cloud applications and products for maintaining cloud service performance.

As for big data, Potts highlighted synergies between Autonomy, and other parts of the HP portfolio. "There's a lot of synergy with Autonomy and our storage division," he said, identifying hardware from the company's 3Par acquisition and data analytics software from the Vertica purchase. "You have got a great combination -- that's a combination of hardware with software and then, of course, services."

At this stage, though, HP's software business lags way behind IBM's in revenue.

HP's software revenue climbed 30% year-over-year during the company's recent fiscal first quarter, but, at $946 million, accounted for just over 3% of the firm's overall revenue. Total software revenue during the company's fiscal 2011 was $3.22 billion, or 2.5% of total sales.

IBM, in contrast, brought in software revenue of $7.6 billion during its most recent quarter, an year-over-year increase of 9%, making up almost 26% of the firm's overall sales.

Potts, though, notes that software has the highest margin contribution to HP's bottom line. "It's not necessarily as much about what the revenue of it is," he said. "The actual contribution of software to the profit and EPS of the company is significant."

HP's Software operating margin was 17.1% during its most recent quarter, well above other, much larger, divisions such as its Personal Systems Group (PSG), Imaging and Printing Group (IPG) and Enterprise Servers, Storage and Networking (ESSN).

IBM, though, has an even larger software margin. Big Blue's software pre-tax margin, which is similar to operating margin, but includes certain expenses, was 43.7% during the quarter. IBM's Software Group enjoyed a gross profit margin of 89.8%. HP does not provide a gross profit margin for its individual business segments.

HP shares have dipped 9.16% this year, while IBM's stock has gained 11.8%.

-- Written by James Rogers in New York.

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