HP’s CEO Expands Move Into Cloud Computing, Lifts Dividend

Hewlett-Packard Co. (HPQ) Chief Executive Officer Leo Apotheker, announcing his strategy for the first time since taking the helm, plans a deeper push into software and the expanding market for computing delivered via the Web.

The company is starting a cloud-computing service that will let developers create applications for consumers and businesses using HP tools and that run on HP servers, Apotheker said at an event yesterday in San Francisco. HP also plans to put its WebOS mobile software onto a broader range of products, ramping up output to more than 100 million devices a year, he said. The company also announced a 50 percent increase in its dividend.

“Everything that we do in the future will be delivered as a service,” Apotheker said. “It’s the first time HP is trying to put all of the elements of what it’s doing together.”

Apotheker aims to get more HP products working in tandem, and expand in software markets dominated by rivals International Business Machines Corp. (IBM) and Oracle Corp. (ORCL) The approach may make its machines more attractive to corporate customers, said Tim Bajarin, an analyst at consulting firm Creative Strategies. Still, the CEO must guard against overspending on the cloud, which requires much computing power to deliver software broadly, said Jayson Noland, an analyst at Robert W. Baird & Co.

“To really take that market on, you need to make a big capex investment,” San Francisco-based Noland, who has an “outperform” rating on the shares, said in an interview. “It’s an asset-heavy approach.”

Break From the Past

From a competitive perspective, HP should be able to trade on its respected brand name, Noland said. Apotheker is breaking from his predecessor Mark Hurd by concentrating on revenue growth instead of cost-cutting, Noland said.

Hewlett-Packard shares have declined 12 percent since Hurd resigned in August, and sales growth will be slower this year and next, compared with the average 8 percent growth under Hurd, according to analysts’ estimates compiled by Bloomberg.

In a move that may assuage disgruntled investors, HP raised its quarterly dividend for the first time in 13 years, increasing it to 12 cents a share from 8 cents, Chief Financial Officer Cathie Lesjak said at yesterday’s event. She also said the company will remain an “active acquirer” and focus software growth on cloud products.

HP, based in Palo Alto, California, fell 56 cents, or 1.4 percent, to $40.93 at 4 p.m. in New York Stock Exchange composite trading. The shares have lost 2.8 percent this year.

Online App Store

HP will both build and acquire the software it needs to help companies write and run applications via Hewlett-Packard’s cloud service, Apotheker said. The company will take a “disciplined” approach to takeovers, he said.

The company will offer applications for corporations and consumers via an online store.

“Any developer can deliver his or her innovation to either the consumer, the enterprise or the small and midsize business,” Apotheker said during a question-and-answer session with reporters. “HP has the ambition of being in all layers of the cloud.”

Hewlett-Packard may let other companies distribute their software through its cloud service, Apotheker said. In a veiled reference to his former employer SAP AG, he singled out applications providers, “some of whom are in Germany.”

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.

‘Big Play’

The company has an advantage when it comes to the corporate market, said Creative Strategies’ Bajarin.

“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.”

HP also said it would begin shipping a new computer tailored for data analysis soon after it closes the acquisition of software company Vertica in the second quarter, which ends in April.

Hewlett-Packard’s ability to sell to consumers and businesses alike will serve it well, since computer users increasingly rely on the same devices for both personal and business-related tasks, said Joshua Greenbaum, a software- industry analyst at Enterprise Applications Consulting. HP competes for developers’ attention with Microsoft, Amazon.com Inc. and Google Inc.

“This convergence of the consumer and the enterprise is a huge issue, and one that HP can really leverage,” Greenbaum said in an interview. “All software is moving to the cloud.”

R&D Spending Lag

Hewlett-Packard’s sales may rise 3.7 percent in fiscal 2011 and 4.4 percent in 2012, analysts surveyed by Bloomberg predict. HP forecast quarterly and annual sales on Feb. 22 that missed analysts’ projections amid lackluster consumer demand and sinking services revenue.

Apotheker said HP could earn $7 a share by fiscal 2014, compared with the average $5.24 estimate for 2011 of analysts surveyed by Bloomberg.

Analysts estimate HP will earn $1.21 in the second quarter, which ends in April, and $1.24 in the third quarter, which ends in July.

In an interview last month, Apotheker said he would overhaul the $41 billion personal-computer division and increase research and development spending to help HP deliver innovative products to the market faster.

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.

To contact the reporters on this story: Aaron Ricadela in San Francisco at aricadela@bloomberg.net; Clifford Edwards in San Francisco at cedwards28@bloomberg.ne

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

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