Profitability a year away for HP software group

Business may be picking up for HP's hardware divisions, but the company's software group was still more than a year from profitability, according to HP executives at a US financial analyst conference.

"The return to profitability in that business is later than I had originally said, and we had originally thought a year ago," HP's chairman and chief executive officer, Carly Fiorina, said.

In its most recent quarter, software was one of the fastest growing divisions within HP, with revenue rising 23 per cent year over the year, but the business unit as a whole was unprofitable.

That trend is expected to continue for at least another year, according to HP.

"Our plan is to approach break-even by the end of 2005," the executive vice-president of HP's Technology Solutions Group, said Ann Livermore, said.

One of the reasons behind the division's lack of profitability was that HP spent $US100 million in research and development over the last year, along with millions more in the acquisition of six software companies, including TruLogica, Consera Software and Novadigm, Fiorina said.

That trend was expected to continue over the next year as HP worked to promote its vision of a flexible computing architecture called the Adaptive Enterprise, Fiorina said.

"We want to bring that business back to profitability, but that will probably not happen until 2005, because we are making very targeted investments in software," she said.

With HP a year into its roll-out of the Adaptive Enterprise strategy, which is similar to IBM's On Demand and Sun's N1 Grid technologies, it was clear that HP must do a better job of integrating the software it sold, an analyst with research company Illuminata, Gordon Haff, said.

"They have a lot of individual assets, but one of the places they've fallen down compared to, say, IBM's Virtualization Engine is in tying all the pieces together from a business solutions standpoint," he said.

"It's a little ironic, given the [Adaptive Enterprise] vision of simplicity and integration," he said, "how complicated and unintegrated some of the components are."

Though Livermore said that HP's software strategy was about management and not middleware, this latter kind of software would ultimately be a "critical" part of Adaptive Enterprise, a senior vice-president with the Meta Group research firm, said Corey Ferengul, said.

"I would tell them that they need to buy BEA [Systems] ... if they want to go toe-to-toe with IBM," he said.

HP has not had great success with middleware so far. In 2001 it spent an estimated $US470 million acquiring application server vendor, Bluestone Software, only to discontinue the Bluestone product line -- by then renamed Netaction -- just over a year later.

Fiorina said she expected IT budgets to grow by only 2 per cent in 2004, but she predicted that her company would see revenue climb by $US7 billion for the company's 2004 fiscal year, driven by growth in its printing, imaging and other hardware businesses, for a total of about $US80 billion.

HP's fiscal year ends Oct. 31.

And though Merrill Lynch analyst, Steven Milunovic,h recommended HP split itself into two companies, focusing separately on either the consumer and enterprise or printer and computer markets, the idea of further restructuring just two years after the merger with Compaq seemed far from Fiorina's mind.

"We have been through as a company a lot of change over the last several years," she said. "All of that heavy lifting is behind us, although we still have work to do to improve our business."

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