HP Plans to Start Cloud Service, App Stores; Raises Dividend

Hewlett-Packard Co. (HPQ) plans to introduce a cloud-computing service and will increase its quarterly dividend, early efforts by Chief Executive Officer Leo Apotheker to boost sales and reverse a share-price decline.

HP will also put its WebOS mobile-operating system onto a broader range of devices for consumers and businesses, in a bid to make the company’s various products work better together, Apotheker said today at an event in San Francisco.

“In this game, size does matter,” and HP will deliver more than 100 million WebOS devices a year, Apotheker said. “We are building an open platform that gives developers a brand that is trusted.”

Apotheker, CEO since Nov. 1, is changing the emphasis set by his predecessor Mark Hurd on cost-cutting to get sales growing faster and improve product quality. Apotheker took over HP as it faces more competition in cloud computing. The company has an advantage when it comes to the corporate market, said Tim Bajarin, an analyst at consulting firm Creative Strategies.

“That 100 million devices number is the most important thing I heard,” Bajarin said. “It could be a big play for HP,” in terms of enterprise customers, he said. “No one else is driving that route.”

Dividend Boost

HP raised its quarterly dividend for the first time since 1998, increasing it 50 percent to 12 cents a share from 8 cents, Chief Financial Officer Cathie Lesjak said at the event. She also said the company will remain an “active acquirer” and focus software growth on cloud products.

Apotheker plans to make better use of the WebOS software that HP gained in last year’s $1.2 billion purchase of smartphone maker Palm, installing it on every PC shipped by HP next year. The PCs will also be able to run Microsoft Corp.’s Windows.

The Palo Alto, California-based company plans to develop an open cloud marketplace that will let businesses and consumers access applications and handle computing tasks via the Internet.

In an interview last month, Apotheker said he would overhaul the $41 billion personal-computer division and use acquisitions to expand in software markets dominated by rivals including International Business Machines Corp. (IBM) and Oracle Corp. (ORCL) He has also said he’ll increase research and development spending to help HP deliver innovative products to the market faster.

Sales Growth

Hewlett-Packard’s sales may rise 3.7 percent in fiscal 2011 and 4.4 percent in 2012, analysts surveyed by Bloomberg predict, compared with an average increase of about 8 percent annually under Hurd. HP forecast quarterly and annual sales on Feb. 22 that missed analysts’ projections amid lackluster consumer demand and sinking services revenue.

Hurd, who was HP’s CEO for more than five years, boosted sales and shareholder returns through more than $24.3 billion in acquisitions and cost-cutting that included plans to eliminate at least 48,000 jobs. Research and development spending declined from 4 percent of sales at the end of 2005 when Hurd took over, to 2.3 percent of sales by the end of 2010.

Hurd departed Aug. 6 after HP said he had violated its standards of business conduct.

Apotheker’s investments in innovation could accelerate sales growth but limit earnings, Jayson Noland, an analyst at Robert W. Baird & Co. in San Francisco, said in a March 11 note to clients.

Comfort Level

“Mr. Apotheker is clearly taking a more revenue-focused approach than his predecessor” Noland said. Increases in operating expenses may limit the ability for HP to exceed earnings estimates, said Noland, who has an “outperform” rating on the shares.

Analysts surveyed by Bloomberg expect HP to earn $1.21 in the second quarter, which ends in April, and $1.24 in the third quarter, which ends in July. Shares of HP have declined 10 percent since Hurd left.

“Investors need to get more comfortable with the new management’s ability to execute,” Abhey Lamba, an analyst at ISI Group in New York, said in a March 10 research note. HP needs to invest more in sales, marketing, and product development to become more competitive, said Lamba, who recommends buying the shares.

HP’s R&D spending of 2 percent of revenue compares with expenditures of 6 percent for IBM, 11 percent for Oracle, and 13 percent at Cisco Systems Inc. (CSCO) last year, according to Lamba.

Acquisition Strategy

IBM, Oracle and Cisco compete with HP in the market for computers, storage and networking gear that run in corporate data centers. In the first quarter, HP got about 70 percent of sales from those products and from printers, about 27 percent from providing information-technology services, and 2.2 percent from software.

Apotheker is looking to buy software companies that can help HP expand in areas including data analysis and computer security. He also said in the interview last week that German software maker SAP AG, where he served as CEO until last year, and customer management software maker Salesforce.com Inc. aren’t on his radar as acquisition targets.

HP fell 16 cents to $41.49 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost 1.4 percent this year.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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