HP's Largest Business Sharpens Blade Focus

Hewlett-Packard does hefty technology work behind the scenes, and it's paid off with standout financials.

The technology solutions group, or TSG, sells servers, storage, software and services that help companies run their technology systems.

The tech unit is the largest group at HP HPQ. It alone accounted for $38 billion in sales in the fiscal year ended Oct. 31 out of HP's $104 billion total.

S, TSG alone is larger than such big hardware makers as Sun Microsystems JAVA or EMC EMC.

TSG has been ramping up sales with growth in specialized servers called blades along with software. The software business is among those aided by an HP acquisition binge that began in 2006. It's announced $6.5 billion in acquisitions in software since then.

HP veteran Ann Livermore has led TSG since 2004, guiding it into growing technology areas and helping drive down costs. Those were focuses of Mark Hurd when he joined HP as chief executive in early 2005.

Livermore recently sat down with IBD to discuss the outlook for TSG.

IBD: The group seems to be doing well. Why?

Livermore: We have gotten our (operations) to a point where we have scale and healthy businesses in terms of our cost structure being competitive.

We still have work to do. The reason costs are important is so you can price to win. The only reason that a tech company really focuses on costs is so you can deliver things at a really good price -- and still be able to generate a good return for your shareholders.

The other thing is that we're well positioned with a lot of our products and our services -- and where the market is moving to.

A great example of that would be our blades technology. With blades we have 43% of a market that's going to be $10 billion in the next three years. If you look just at the last quarter, our Q4, our blades business grew 78%.

IBD: What is blade technology?

Livermore: (It's a setup in which you) have an enclosure where you slip (the blade server) right in.

And you can have in the enclosure server blades for computing. You can have storage blades.

Right inside the enclosure is the whole network capability built in, the management software to operate it.

It takes 96% less time to install a blade than any other server.

IBD: What are TSG's main goals this fiscal year?

Livermore: The first (item) is helping customers build out these next-generation data centers.

Blades are right at the heart of the computing architecture there, as well as our standard x86 (Intel compatible) servers, our Integrity (server) products and our storage products.

We've built out services to help (customers). You may have seen us announce the acquisition of a company called EYP Mission Critical Facilities.

They're the best services organization in the world at being able to draw the blueprint, do the design, do the build-out of these next-generation data centers and build in the whole power efficiency (features).

(Also), there's software. IT (information technology) costs are rising. And the part that's rising is the labor costs.

We (develop and sell) the software category that addresses the most urgent cost problem that every IT organization in the world has. That software business is just exploding. The revenue grew 79%. The profit grew 308%.

And then on the services side, we're building out our services in support of all those areas.

We're focusing our services on being the best in the world in helping our customers be able to deploy and use technology for their advantage.

IBD: Why is software important?

Livermore: The guidance we've given Wall Street is that between now and the end of '09 we'll grow our software business, revenue growth, between 15% and 20% and our operating profit between 20% and 22%.

No other business at our company makes higher operating profit levels than that.

IBD: There's been talk among some HP executives that the company is willing to do more acquisitions. Can you talk about that?

Livermore: We lay out our product growth map. We're always looking at the choice of do we develop something ourselves, do we partner for it or do we acquire it.

And on an ongoing basis we are always analyzing that (acquisition) alternative. We have consistently said that both the services business and the software business are areas where we are open to acquisitions, when targets fit those criteria.

IBD: Software, though, remains a small percentage of HP's sales.

Livermore: It's a small percentage of HP, but if you'd look across HP and looked at all the software we have ... we'd be the sixth largest software company in the world. About 70% of all HP R&D is on software.

If you look inside our LaserJet printers or some of the things for our workstations or our servers or our storage, we have tremendous software expertise. It's powerful in terms of the (profit) margin growth. It's powerful in terms of the value to customers.

IBD: Can you give some specifics on how you're increasing sales?

Livermore: One of the things that HP's been very focused on is how do we take the nonvalue-add costs out of our business and reinvest some of that cost into more market coverage.

In 2007, we added 700 sales reps to our organization. Then through software acquisitions, we've brought on 1,100 software sales reps. You look at that and say, "Boy, year to year, HP added 1,800 sales reps." We'll add more again this year.

IBD: What has Mark Hurd brought to this organization?

Livermore: I think Mark is a very powerful business leader. He's very clear in the direction, the priorities of the company. So no one is confused.

He's very focused on the market and on the customer and on growth. He's a CEO who spends a lot of time with the customers. He has the capacity for operational review in detail that makes everybody sharper.

When you go into a review you know you've got to know your stuff. You've got to be making progress on your stuff every day.