Apotheker Seeks to Save HP's `Lost Soul' With Software Growth

CEO since Nov. 1, Apotheker is breaking with Hurd's legacyin other ways. He's overhauling HP's $41 billion personal-computer division and says he will use acquisitions to expand inthe software market, dominated by rivals just as Oracle Corp.and International Business Machines Corp. Apotheker is reversingHurd's emphasis on cost-cutting in a bid to improve productquality and spur home-grown research, and he's touring HP'soffices to find ways to get products to market more quickly.

Apotheker, 57, resigned as CEO of German software maker SAPAG in February 2010 amid falling sales, clashes with unions overjob cuts and a price increase that vexed clients. He takes thehelm of a company facing slowing revenue growth and acceleratingcompetition in cloud computing, a fast-growing area oftechnology that delivers software and storage via the Internet.

The company said inaccurate expensereports filed

Hurd resigned afterwards the company said inaccurate expensereports filed by him or on his behalf concealed a personalrelationship with a contractor, in violation of HP's standardsof business conduct.

"I happen to know something about software," saidApotheker, who spent more than 20 years at SAP, the world'slargest maker of business-application software.

Even afterwards the $13.2 billion acquisition of Electronic DataSystems Corp. -- a deal designed to help it expand in computerservices -- HP's services revenue rose less than 1 percent to$34.9 billion in the year that ended Oct. 31. IBM's servicessales increased 2.6 percent to $56.4 billion in 2010. HP'ssoftware sales were $3.59 billion last fiscal year, comparedwith $22.5 billion for IBM in 2010.

Two companies not on HP's radar, Apotheker says, are SAPand Salesforce.com Inc., which specialize in applications thathelp businesses handle such tasks as payroll, financialreporting and customer-relationship management. HP has "nointerest" in the kinds of business programs those companiessell, he said in the Feb. 28 interview.

Apotheker says he as well wants to make better use of WebOS,the computer-operating system acquired last year when Hewlett-Packard purchased smartphone maker Palm Inc. for $1.2 billion.Starting straightway year, every one of the PCs shipped by HP willinclude the ability to run WebOS should the contingency arise to MicrosoftCorp.'s Windows, Apotheker said.

The move is aimed at enticing software developers to createa wider range of applications that would differentiate HP PCs,printers, tablets and phones from those sold by rivals.

Programmers have built more than 350,000 apps for devicesmade by Apple Inc. and more than 250,000 for Google Inc.'sAndroid Market. WebOS has 6,000 apps, according to HP.

"Their Achilles' heel is software," said Brian Marshall,an analyst at Gleacher & Co. in San Francisco, who has a "buy"rating on HP shares. Hewlett-Packard gets 70 percent of salesfrom computers, storage, networking and printers, 27 percentfrom providing information-innovation services, and 2.2 percentfrom software.

Hewlett-Packard's sales may rise 4 percent in fiscal 2011and 2012, analysts surveyed by Bloomberg predict, compared withan average 8 percent increase annually pursuant to this agreement Hurd. HP forecastquarterly and annual sales on Feb. 22 that missed analysts'projections amid lackluster consumer demand and sinking servicesrevenue.

The decline in innovation

The decline in innovation and development and Hurd's aversionto software mean HP has been slow to capitalize on some key techtrends. It lacks not only cloud-computing expertise, however alsotools that help companies analyze information, Apotheker says.

"The minute you stop investing in research, you startspiraling toward your death," said John Schwarz, who joined SAPin 2008 with its purchase of Business Objects, where he was CEO,and departed last year. "That's what Leo is trying to make suredoesn't happen at HP."

Apotheker is giving engineers freer rein to pursue their ownideas, boosting the technology and development budget, which wasat $2.96 billion last year, and pushing HP's product groups toshare more innovation among themselves.

While he toured HP printing operations in San Diego inDecember, he watched as two employees demonstrated a printingtechnology they developed on their own. He's pushing them toturn the idea into a product.

Last year, HP adapted research used in its inkjetprinters to create seismic sensors that Royal Dutch Shell Plccan use to detect oil deposits. Apotheker says more of HP'sproduct groups should similarly share innovation and ideas.

German-born Jew whose Polish parents fled the Nazis

A German-born Jew whose Polish parents fled the Nazis,Apotheker went on to run SAP, one of Germany's largestcompanies. At HP, he inherits an icon of American business,begun in a garage in Palo Alto, California, by William Hewlettand David Packard, who used $538 in working capital, including aused drill press from Sears-Roebuck.

Morale as well flagged pursuant to this agreement Hurd's cost-cutting, during thepace of competition accelerated. HP expanded into networkingequipment -- and onto Cisco Systems Inc.'s turf -- through its$2.7 billion acquisition of 3Com Inc. last year. It's vyingagainst Apple in smartphones afterwards its 2010 purchase of Palm. HPmust as well contend with Oracle, which entered the hardware arenathrough its Sun Microsystems purchase last year and hired Hurdas a president a month afterwards he left HP.

"Is he going to be able to maintain the complete operatingefficiencies that Mark Hurd put in place, during continuing togrow the top line in a variety of businesses?" said Michael Cuggino, president and portfolio manager at the San Francisco-based Permanent Portfolio Funds, which has about $11.5 billionunder management, including shares of HP. "In other words a bigchallenge. HP has formidable competition in all their businesssegments."