Fiorina Says HP Is Ready to Grow

by Timothy Prickett Morgan

Hewlett-Packard hosted its annual securities analyst meeting in San Jose recently, and the company's top brass laid out its plan to grow revenues consistently at a rate in the high single digits (twice the rate of growth in the worldwide gross domestic product) and to grow profits by more that 20 percent a year. This is a very ambitious goal, similar to that of its main rival, IBM. But HP thinks it has a unique way of attaining these goals.

Every company sees the future through its own eyes, in relation to its own products and capabilities, and a company as complex as HP will naturally see the world as a complex market with lots of places for it to play in. At some point, chairman and CEO Carly Fiorina will probably not have to justify the Compaq acquisition from nearly three years ago when she talks about HP, but that wasn't the case this time. Rather than reiterate what she said, I ask you to imagine what HP's enterprise server, storage, and services businesses might look like if the company had not acquired Compaq. They would be a mess, and getting hammered by whoever did by Compaq. Let's just say for once and for all that the Compaq acquisition was good for HP even if it has been tough on Compaq. Now that the transition is mostly done, HP is throwing off more than $6 billion in cash and has $15 billion in the bank. IBM, which is roughly the same size, at around $80 billion in sales a year, wishes it had $15 billion in the bank. (The tens of billions of dollars in share buybacks in the past decade have come at a cost.) The HP that Fiorina has built is HP, whether we like it or not. And, whether we like it or not, Fiorina did exactly what she said she would do, with a few missteps, but that is to be expected given the largest merger in IT history, and HP is a healthier competitor because of it.

That's not to say that HP doesn't have problems. It surely does, and that is why it has merged its server, storage, and services units to try to shift from selling products to solving IT problems. In her keynote address at the analyst conference, Fiorina talked about how the 1980s were about having stable, reliable (and relatively simple) IT systems, and that the 1990s was the era of the hot box, when customers chased best-of-breed technology to build client/server and then Internet-style computing infrastructures. In the 2000s, everything is about going digital, mobile, and personal.

"This is a profound change in the industry," she explained. "The key technology imperatives are about simplicity, manageability, and adaptability. These trends are changing entire industries, and this is the world we built the entire company for." She said that HP would bring the same focus on execution to selling products and services in this new technology era, as it did with the HP-Compaq merger. In fact, it is the merger that made HP aware that the lessons it learned in streamlining one of the most complex manufacturing, supply chain, and IT operations in the world made it realize it had to change not only what it sells but how it sells. When customers buy into HP's Adaptive Enterprise approach to IT, what they are buying is a piece of that HP merger experience. (Peter Blackmore, who heads the new Customer Solutions group sales arm of HP, said that HP has booked $7.8 billion in sales related to Adaptive Enterprise since introducing the concept.)

What HP wants to do now is wring profits out of its supply chain, just like every other manufacturer and distributor. Fiorina said the company has a $50 billion supply chain (compared with $25 billion for Dell and $20 billion for IBM), and that there is tremendous opportunity to cut costs and get more flexible by managing that supply chain better. HP has consolidated 26 supply chains down to five since the merger, and has reduced the time it takes to add a new partner into a chain from five weeks to less than two hours. As HP figures this out, it will sell the expertise to other companies.

While this is interesting, what Fiorina really wants HP to do is get a bigger piece of the markets that the company plays in (PCs, servers, storage, services, and to a small extent software) as well as targeting emerging and nebulous markets such as digital media. Getting more share from where it is already playing is an obvious tactic, and there is apparently a lot of room for growth here for HP.

According to HP's own estimates of the IT market, HP played in markets that comprised a total of $710 million in spending in 2003. The enterprise market, at $320 billion, was about half of the total potential market for HP, but HP only had 8.4 percent of that market. HP reckons it has the largest share of the $186 billion market of small and midsized businesses, which is growing at 5.8 percent compounded annually, but that share is still only 10.2 percent. (The enterprise market us growing at about 5 percent annually, according to HP.) There seems to be less upside in the consumer market, which HP estimates was worth about $87 billion in 2003, of which it had about an 18.6 percent share. The public sector business (healthcare, state, local, and federal governments) comprised about $118 billion in opportunity, but HP only had a 7.6 percent share. While getting market share from 10 to 20 percent is not as easy as getting from 5 to 10 percent in most markets, HP is one of the two largest IT suppliers in the world. If anyone has a shot, it is a company like HP. (Getting beyond 25 percent seems very unlikely.)

In the $710 billion IT market that HP plays in, HP reckons it has about 23 percent of the $98 billion imaging and printing market, about 12.6 percent of the $168 billion PC business, about 16 percent of the $96 billion enterprise systems business, and only 3.5 percent of the $349 billion IT services business. (Again, those categories are only for products and services HP offers, not for the entire IT sector.)

HP is also adding new markets that it believes can push the company's total addressable market to $1 trillion, and by getting products in these new markets it can increase the IT spend in places where it already has customers. HP reckons that, in the 2003 market, security was worth $11 billion, IT management software was worth $15 billion, mobility products comprised $200 billion in sales, and rich digital media comprised another $400 billion. HP's share in these markets is very small, and this is what Fiorina wants to change. She also said that even the largest HP customers typically spend only 10 percent of their IT budget with HP. She wants that number to go up, too. It's all about cross-selling, upselling, and stressing the value of the full HP portfolio. This is easy to say but hard to do.

The trick for HP will be to move into these new markets while gaining revenue and shipment share in core markets like servers. According to Ann Livermore, who heads HP's new Technology Solutions Group, the X86 market, where the company's ProLiant servers play, was a $19 billion market in 2003, growing at 14 percent annually. HP reckons that the high-end server market, where its Unix and proprietary machines play, is a $22 billion market, but it is declining at 3 percent a year. Without Compaq, HP would be facing the same decline in the high-end server market without a strong X86 server market to offset it. Anyone who argues otherwise is a fool. The related network storage business is a $20 billion market, growing at only 3.5 percent. Compaq contributed mightily to HP's storage business, and the company hopes that driving up attach rates of storage on servers will help it grow its market share.

Simply put, the server and storage businesses are what give HP the credibility to chase services business, particularly complex outsourcing, as it has with customers like Proctor and Gamble. HP wants a profitable server business, but it wants a bigger server business a lot more. It will be interesting to see how the company balances these two desires and tunes its profits. It will also be interesting to see how HP balances its desire to push its own HP-UX Unix while Linux and Windows are increasingly dominating IT budgets. While HP has a very large Linux business--about $2 billion out of a $25 billion market in 2003--it has a much larger and more profitable Unix business that it wants to sustain as long as possible.