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ANN LIVERMORE
"Technology Solutions Group: Driving Execution and Growth"
Technology Solutions Group (TSG) Industry Analyst Summit
Boston, Massachusetts
March 27, 2006
© Copyright 2006 Hewlett-Packard Development Company, L.P
All rights reserved. Do not use without written permission from HP.
Good afternoon. We've certainly been looking forward to this week to spend with you. At the last meeting that we had, we got a lot of feedback about the fact that you wanted more detail. More detail on HP Services, more detail on our software business, on our server and storage business, and also how we bring these together as solutions for our customers. And that's what we've lined up for the next three days.
We've also set up more time for one-on-ones, so we hope that we'll be able to achieve the objectives that you have for this conference over the next few days.
What I hope you'll see is HP is very focused on both execution and growth. And I think you'll see throughout the presentations, throughout the discussions, we've done a lot of work on cost. We've done a lot of work on execution. And we're also doing a lot of work on growth and are starting to see some of the positive results from it.
This is a simple statement of our strategy as an organization. We want to make HP the best at helping customers be able to manage and transform their IT environment. The "manage" word is really critical, because of the intellectual property and capabilities we have around management. And "transform," in terms of taking them to the next-generation data center -- taking them to an environment that's better.
We want to do this in such a way that we can drive business performance improvements for our customers, aligning the IT and the business activities to capitalize on change. And that phrase you've heard from us for years, around the Adaptive Enterprise. That first bullet is what we have said all along that we're trying to do with the Adaptive Enterprise.
Underneath it, we're focused on creating the very best products and services in the world, and being great at both creating them and delivering them. We stay very true to our commitment to standards, and then choose intellectual property that matters to customers to build on top of those standards. That intellectual property may take its form in services knowledge, services expertise or in software that we may sell separately as a software product or integrate in with our servers or storage.
We've picked some particular areas, and you'll hear us talk about these areas of IT throughout the discussion as part of our next-generation data center activities. Particularly, IP around power and cooling, around management, around virtualization and automation. We're investing in all these areas to have a differentiated set of capabilities.
And finally you'll see in our go-to-market activities that we're allowing customer choice. And we think customer choice in how they work with us enables us to grow the most revenue and to have the best relationships. And we'll talk more about what this means.
Let me take a couple of slides just to bring you up to date on our business performance. As you look over the last four years in terms of revenue trends, it's a good story. If you look at ESS, our server and storage business, revenue growth in '03 was minus 5 percent. This last year, FY05, up to 11 percent.
If you look at the services business, growth was flat in '03 over '02. 12 percent last year. Now the 12 percent was aided a bit by currency and by M&A activities, but it was still a nice growth improvement over that time period. We've gone eight quarters in a row where HP Services has outgrown IBM Global Services.
In our software business, you can see that in '03 the growth rate was minus four. Last year, 15 percent. And contrast this to our largest competitor, who has had no organic growth the last few years. So we're very focused on growth. We're going to continue to drive it forward, and you'll see a lot of the plans that are going to be behind making this continue to happen.
Operating profit trends. This is also a very good story for us. Dramatic improvements in both the server and storage business and in the software business. If you look at ESS in FY02, minus 2 percent operating profit. In '05 we delivered 4.9 percent, and last quarter Scott and his team delivered 7.7 percent. So a great turnaround story.
In the software business, in '02 we lost $349 million. That's almost a million dollars a day. Last year we lost $59M. And the last two quarters - our fourth quarter, our first quarter -- were both profitable. And that's a trend we're confident we can continue.
In our services business, we clearly had the most pricing pressure and profit pressure in that business over the last few years. We delivered 7.8 percent operating profit the last quarter. And the team has great programs in place, driving down labor costs, improving our profitability in this business. This, we believe, is going to continue to be a very price- and cost-competitive business, so you'll see us continue to do a lot of work improving our profit levels. We're pleased with the progress, but still have a ways to go.
So this picture certainly has been one of the big contributors to the HP stock, in terms of our shareholder value that's been created, particularly over the last year or so.
What are our priorities? Well, none of this should surprise you, because you've heard me talk a lot about those costs and growth. And great companies always work on both, so we're going to work on both. We work on cost so that we can price to win, but at the same time deliver a good shareholder value. And we work on growth because there are no great shrinking companies. We work on growth because it's really at the core of HP.
We've picked three areas in particular around growth that we're focused on. One is what we're doing around the next-generation data center and the leadership position that we'll drive there. And I'll talk a bit more about that. A second area around growth is really driving and improving our go-to-market program, and we'll talk about that. And then, also having customer loyalty become a huge advantage for HP. It's always been an advantage for us. But we're at a point where we're seeing competitors slip. And we're going to turn on the attention and the work here, to make it even more of a gap between us and our largest competitors.
On cost, you'll see us drive down real estate costs, IT costs, HR costs, overhead costs. And at the same time, you'll see us reallocate R&D investments to the best areas for growth. And you'll see us invest more in sales resources for additional coverage.
The last area we're focused on is around leading our people. We have got a very talented employee base. Everybody says that who comes to HP and meets the people who are part of the organization. We've got a very strong management team. I'd stand my management team up against anybody in the industry. And so this is an important part of getting the whole machine running and executing the best possible.
So the rest of my pitch I'm going to talk about growth and the activities that we have underway associated with growth. This is a picture that we introduced to you back associated with the Adaptive Enterprise, as the balancing act that we want to help CIOs be able to deal with. CIOs are always dealing with all four of these things at once. It's never so easy as to only have one of these.
Clearly a focus on maximizing returns, whether it's the P&L or the balance sheet. Around minimizing and managing risk, whether it's business continuity or security. Around business performance, whether it's the service levels that are delivered by IT or the service levels that are delivered by a business process. And finally, agility. The ability to capitalize on change and have it as a competitive advantage.
There's a customer panel this afternoon that I think is going to be really interesting for you, and these customers have done some amazing things. They've in fact achieved a lot of very impressive results. And here's just a little bit of how you could map some of their activities back against this balancing act.
Clearly with AOL, driving massive cost reductions. They've outsourced to us some integrated support activities for their Sun servers, IBM and Dell industry standard servers, HP servers. And we're delivering a 25 percent cost reduction year one, 30 percent year two, 35 percent year three.
The greater Toronto Airport Authority needed to be able to implant a secure wireless LAN. Also wanted to use HP OpenView to manage the environment. We're helping them with some of the baggage system activities and other associated stuff through this application.
Starwood Hotel. Everything about the guest experience, making their hotels deliver the best guest experience in the world. We've been involved helping them design, implement and then manage some of these systems.
And then finally the Bank of Baroda. Very exciting set of activities for us around their core banking system. We were transforming the core banking systems and bringing Internet and phone services to the bank as well - an area where we teamed with emphasis. And the bank is seeing some really great business results.
So you'll hear more from our panel this afternoon about these activities. But you can see these problems are areas we're focusing on. We're delivering solutions, and we're working with leading companies.
You've also heard us talk in the past about our solutions for the Adaptive Enterprise - our "five Cs." And these are things we've been delivering, selling over the last several years. There are solutions to some of the biggest pain points that our customers have.
First of all, continuity -- business continuity. We bring to the market as a part of the solution our high-availability servers or high-availability storage. Clearly the services suite that we have around business continuity and mission critical support. We have a great set of offerings around continuity.
Consolidation. Whether it's consolidating data centers or just servers or storage, we have a great set of capabilities there again with our software, our services and our systems that we're able to bring to the consolidation story.
Control. Control is all about management. We have an incredible portfolio -- you'll hear more about this over the next few days - in our OpenView platform, to help customers get control of their environment.
Compliance. Compliance is on everybody's list of pain points. And we very specifically developed some Information Lifecycle Management solutions, combined with our storage capabilities and services capabilities, to help companies like NASDAQ around their compliance needs.
And finally, collaboration. Our end-user workplace services, our Total Print Management, the combination of our products from a PC and printing perspective combined with our services -- another powerful set of solutions.
You'll hear more about these solution areas and what we're delivering in the next presentation with Andy [Mattes] and Jack [Novia], and also in our experience center. We'll have this set up tomorrow so you can see demos and talk to some of our experts about all these solution areas.
One of the big customer problems that is still looming is the fact that every year they're spending more and more and more just operating and managing their IT environments. In fact the costs there are growing dramatically faster than the other costs that they have as part of their IT budget.
This is a problem that HP is going to be the best at solving with the combination of our staff here, our systems and our services. We have some capabilities here that we think are going to position us quite uniquely to help address the problem of that blue bar and the rising operational costs.
Some of you have heard us talk about a vision or a view of a next-generation data center. Helping customers be able to move from a current state where they have islands of automation to an environment where they have pools of resources. Being able to move from what they have today to more of a 24x7 lights-out computing center.
Clearly this will drive better utilization of all the IT assets. But even more importantly, the goal is to drive the labor costs down associated with the operations of IT. And driving the labor costs down is good from a cost perspective, but also from a quality of service perspective.
What are we going to focus on to do this? There are a set of investments we're making, a set of areas where we're going to develop unique intellectual property that ties back to the earlier strategy slide that I showed you. It's all built on industry standard products and services where HP has, for many years, had a leadership position and will continue to lead.
Power and cooling is an area that's critical for our customers, particularly with their bladed environments. That'll be another area of differentiation for us. Management, where we have a tremendously powerful portfolio of services and software. Security activities, where we have capabilities ranging from services to, again, things like our virus throttling software. Virtualization. And also automation.
You're going to hear a panel this afternoon talk through the investments that we're making and some of the areas that we're driving as we look forward.
The next-generation data center. We went through quite a bit of research with customers on what should we call this. And we found that we had tremendous customer association with Adaptive Enterprise. They like Adaptive Enterprise. They like the idea, they like the vision, and we got overwhelming feedback that we ought to call this "Adaptive Infrastructure." So you'll see us talk about how we're going to substantiate this, bring it to market as the Adaptive Infrastructure, as part of an Adaptive Enterprise.
There are lots of different ways we can work with customers to help them in this sort of environment. We think this is one of the advantages that HP has - the choice that we can offer customers. We have a great product sales motion where if customers want to just buy products and associated support, build it themselves, we can work with them that way.
We can work with them in a consultative manner, where we do the design and the implementation and then they operate it. They can work with our value-added channel partners to help them with those services. Or they can choose to outsource it to us and say, "HP, you take it. You manage it and you transform it to a more adaptive enterprise for us."
You'll see us deliver with customers in all these areas a great volume of business just selling products, and then also the more services-oriented, solution-oriented approaches. And we'll use all these approaches with those medium-sized customers as well as our larger enterprise customers.
I'm going to take a moment now to just review one chart on each of the three businesses. Our software business is really turning into a fabulous business for HP. It's about two-thirds OpenView, about one-third HP OpenCall. You'll hear Tom Hogan and the team talk more about OpenCall tomorrow. So I want to focus just on HP OpenView during these few minutes that I have to talk about software.
It's a great business all by itself, but it's also a great business in terms of the other things it helps us do. If you start at the bottom of the chart, optimized infrastructure, this is what most people think of when they think of HP OpenView - system and network management, the performance and event management, the application management. It is so well associated with OpenView.
But with all of our M&A activities and our organic development, we've added on top of that IT process automation. In particular areas around identity management, around change and configuration management, around asset management. And these are really key areas for us. Around service desk management. A very rich set of IT process automation capabilities.
And finally, over the last couple years we've introduced capabilities around business and IT alignment, those IT governance capabilities, and also with our business process insight manager, a way to check business system health. So you can see a much more robust set of management capabilities than you might have realized.
Now the other powerful thing is that we take all this software and deploy it and use it with our services business, both consulting around and also as a tool set for the delivery of our managed services.
HP Services. After the last analyst meeting that HP hosted, we got a lot of feedback about "Mark [Hurd] didn't talk enough about services. You guys didn't talk enough about services, if services is important to you."
Well, Services is a $15.5 billion business that makes really great profit. And Services is at the heart of delivering the value proposition that we've claimed for our business. It's at the heart of HP being able to manage and transform IT environments for our customers. And so it's as integral to that value proposition as anything else HP has.
Any services company in the world would die to be the services arm for HP's printing business, or to have the customer access that we have through our PC business. So the end-user workplace services, the printing services are a phenomenal services growth opportunity that our services businesses have, because it's part of HP and it can deliver differentiation in those technology areas.
And finally, as a company we only have six reported statements. We have servers and storage. We have software. We have services. We have printing. We have PCs. And we have financial services. When a company declares something a publicly reported segment, it's because it's a big important business.
You're going to hear a lot more about the services strategy, the things we're working around, our portfolio, our customer engagement, our global delivery activities. In the presentations tomorrow, in the NGDC [next-generation data center] discussions, and also in the services breakout on Wednesday. I'm very excited about where we are in the services business and what our opportunity is here. And we hope that you give us some of your advice and feedback, and leave as excited as we are about this business.
Our server and storage business has really been a story of focusing on costs, on growth, on shares - all those things together, really delivering great profits. We've talked a lot about the focus we've driven on cost reductions, having an industry-leading cost structure. Scott [Stallard] and his team have done tremendous work here. And that allows us to be able to price to win, and make those tradeoffs between how much share do we want and how much margin do we want.
Having a leading position in our product categories and our systems categories is absolutely essential for us. We have been No. 1 in ProLiants for 38 quarters, both in revenue and in units. You'll see us put more and more focus around revenue share, because we believe that's where the highest value is. But you'll see us focusing and working on both, but even more focused on the revenue shares.
And Unix. Quarter after quarter we're either No. 1 or No. 2, depending on how the particular quarter goes. And as you look at our storage business, last quarter the EVA grew 28 percent and the XP grew 14 percent. So we're back on a good growth trajectory with our storage business.
The power of the portfolio is a tremendous differentiator for us, both what Scott has inside his portfolio of servers and storage, but then added on top of it what we can do with our services. From an attach perspective, from a software perspective, bringing these together as solutions.
And then finally we've talked a lot about IT and being focused specifically around IT, both inorganic as well as organic investments that we make. And a lot of focus - you'll hear more from Scott tomorrow - around unified management. The fact that we can manage the environment - not just the single server or single storage device, but a unified management - is a huge advantage for us.
So again a summary of this business - we're very excited about where we're positioned here and also what we can do driving it forward.
Our go-to-market activity. The mid-market is very important for HP. We sell a tremendous amount of products and support into the mid-market. And you'll see us continue to do that, both going direct as well as through our channel partners. But one of the things that we have recognized is in the Global 2000 we have an incredible growth opportunity. We have barely scratched the surface in terms of the share of wallet that is available for HP to capture.
What we've done over the last couple months is to go through a very detailed analysis to put as much science behind our selling and go-to-market activities as we have in our engineering activities. We've done the analysis by account for where they currently spend money with us and where they're spending it with somebody else for the Global 2000. We've done the groupings by industry.
We know the trends, we know the capabilities, we know what's there for us to be able to earn and win. And we know which of our portfolio aspects, both individual products or solutions, fit best for which industries and where we might want to acquire or develop some additional intellectual property to make a difference.
This is a very exciting area for us, and I think that you're going to see a step function difference over the next three or four years in the professionalism that we drive, the results we drive and also some of the resources investment that we put here. So this is a really exciting area for our team, and you'll see and hear a lot more about it over the next couple days.
Partnerships and alliances, as you've heard us say for many years, are core to our strategies. It's not just something we do. It's part of our strategy. Systems integrators are an important part of the values that we can bring to market, and last year our business with the systems integrators grew 20 percent. So we're very pleased with that.
When we look at the big ISVs, we had the leading market share within Oracle, Microsoft, and SAP. You'll see us work really hard, always keeping those relationships fresh and exciting. We're up to over 7,600 Integrity applications, and this number goes up every day. We're pleased there.
We've talked a lot about our channel. Our channel is a huge differentiator for us against both IBM and Dell in terms of what we can do, and particularly against Dell. We've got 154,000 channel partners, and year after year after year have grown our business with them.
We've got interesting go-to-market and R&D relationships in the media and entertainment industry and also in the telecommunications industry. BT and AOL, just as two examples of great partners there. And then also you know about some of our technology partners, in particular AMD and Intel, and the key role that they play inside our roadmap.
So this is part of our growth strategy, it's part of our business strategy. You'll see us work it and drive it really hard.
Finally, on customer satisfaction and loyalty. We are maniacs about measuring this. We have our own internal, very detailed set of metrics called the "Total Customer Experience." It's part of our evaluation and compensation system for our employee base and clearly for our management team. Then on top of it we look at all the external data. Things like with TBR, where the ProLiant has had the No. 1 in customer loyalty, and we work hard to maintain that.
JD Powers, with all sorts of awards we've gotten around the customer service experience. Many awards for our support Web site and our services Web site. CRN and channel awards specifically around storage. We drive these really, really hard.
When you work on customer satisfaction and loyalty, a lot of it is business fundamentals. There are three areas that we're focused on and have very detailed goals and metrics. The first one is around the fundamentals - shipping stuff on time, good product quality, support delivery against the commitments that are made. We work that really hard. And as basic as it sounds, customers have pointed to HP as better and different in meeting our commitments.
Making it easier for customers to do business with us. Our whole quote process, our invoicing process, all those kinds of things, our contracting, our T's & C's.
And then finally, our customers are telling us they want us to be more proactive. They want us to be suggesting things as opposed to responding to the needs they have. And so we've done a lot of work there around our top accounts, on how we can be much more proactive in what we drive.
I really believe you're going to see over the next couple years this is a big advantage area for HP. We've got Dell declining, losing some ground in customer satisfaction. We've got some shaky results from some of our other large competitors, so we have a real opportunity to have this be a clear leadership area for HP.
So that's the strategy. These are the things we're focused on. Manage and transform their IT environments. Nobody better than us at doing it. We're really poised to win and to lead in the marketplace. I think a lot of the trends that are happening, a lot of the factors that are happening, a lot of the things happening with some of our competitors right now, have created a tremendous opportunity for HP.
And what we need to do now is to be able to take these plans that we have, execute well against them and really drive every single day, increasing customer value from the products, the services and then the solutions that wrap together for our customers.
Now we have a few minutes for Q&A and I believe we have roving mics. So if you have any questions I'll be glad to take them.
Mitchell: Hi. I'm Mitchell. You make a comment that everything is coming together in terms of go-to-market and strategies, etc. Having been a long-term follower of HP, I really don't see that at this point in time. I feel different groups are still doing different things and different go-to-market, especially around what they call industries, etc. And this is what I'm getting back from the channel in terms of the value added to them, etc. Can you talk a bit about that?
Ann: Yeah. Well, you know, I told you that we had done this analysis and planning on the Global 2000 over the last few months. We're just now in the execution associated with it. We have lots of work to do. We've made great progress over the last couple of years but we still have a lot of work to do. And I think everybody inside HP would say that.
We know some things that we have derived from the data about how we get the best share of wallet, which industries we have the best share of wallet, the intellectual property that we need that really drives a difference by the industry segment. So I think we have gotten more analytical than I've ever seen us be, about how to really attack and improve our go-to-market activities.
We have a lot of work still to do there and I look at that as upside, in terms of on top of the growth that we have. If we can really execute well in these areas, that's upside for us against it. With some of the channel partners, I guess we'd have to look very specifically at the channel partners. They're a critical part of our revenue stream, and we are always working hard to try to drive as much growth as we possibly can through the channel partners. And we have a lot of different forums and activities with them.
But if you've got some specific feedback for us, pull me aside and I'd love to hear it.
Female Voice: I was wondering if you could share with us - this is now your second or maybe even third time a new CEO seizes the reins and decides to measure a few things and come up with some new plans.
It sounds like things actually happened this time. And I was wondering if you could share with us maybe an example of financial services. How did HP make some of these measurements and make some of the decisions about where intellectual property could be added? Could you put some maybe color on that?
Ann: HP has gotten much more data driven in our decision making. And I think one of the things that Mark has been very powerful with has been really pushing people to understand the data and the details behind their business and making decisions based on the data as opposed to somebody's opinion.
And as basic as it sounds, it's very powerful to do that. It also tends to make people operationally sharper around the business. You know, an example I could give you is, we've done an R&D productivity analysis. We looked at all the R&D investments across the company and the revenues that they're going to generate and the margin that they're going to generate over a multi-year period.
And as a result I've chosen two or three areas that are going to get a lot more deep dive and analysis around the big investments. Are we getting enough from them? How do we accelerate the return? So that would be an example.
Our analysis that Andy Mattes' team drove around the sales and the Global 2000, we have gotten very detailed information - a heat map of the 2000 accounts and where the best opportunities are by name, by solution area. It's pretty easy to know where you want to deploy extra sales reps when you've gotten to that level of detail.
Those would be just two examples of things that I think have been real operational, fact-based, decision making that Mark has driven.
Female Voice: The five Cs that were there from I think the previous regime. That's been validated then? It started out with the "same old," and then we went into a dive in the slope into some new materials.
To what extent are some of the classic elements of your group strategy holding up?
Ann: They're all holding up.
What I was trying to convey - and it sounds like maybe I didn't - is that this strategy that was started with the Adaptive Enterprise has been building. And while some of our competitors feel like they needed a new strategy, we think ours is working.
And the five Cs are clearly solution areas we're selling a ton of. We're going to continue to sell a lot of consolidation projects and a lot of control projects and compliance projects. So all those things we're continuing to do.
We just believe now that as you look at IT operations it's just such a glaring problem from a cost perspective for our customers, and a labor perspective, that there is an opportunity to really do breakthrough things with some technology to take some of the labor and cost out of managing IT. And we think that plays big time for us for our software businesses and our services businesses. It can give us a huge advantage if it costs less for us to do an outsourcing deal than our competitors.
And so all those things have really been building over time and they certainly are continuing to be the things that we're selling.
Last question.
Female Voice: Ann, I'd like to ask you to think about all of the software that you have announced over the last year or two, either through organic growth or through acquisition, and help me understand how the takeoff has been in the partners through integration with their solutions, which is often a good measure of the success of that software in the marketplace now going out into the future. Can you talk a little about that?
Ann: Yes, and we can probably add a little bit more to it tomorrow during the discussions as well. If we look at our OpenView portfolio and the acquisitions that we've made there, we've made a number of acquisitions around identity management. Our partners selling into the financial services industry are really excited about that.
We acquired Peregrine for the asset management and service level management, and in particular systems integrators and some of the outsourcers are incredible users, customers of those particular product areas.
If you look at the management capabilities that we bought around both blades and around our storage capabilities - so AppIQ for storage resource management, which became part of our Storage Essentials, and RLX, which is management for bladed Linux environments - our partners are using those software tools as part of solutions that they develop and resell and build. With their applications and their software all around it.
So those are great areas for us. We know that there's a lot of additional growth opportunity for us around all those new areas. They are new areas, so they're revenues that we think are going to ramp really well. And I think you know that every software business that's successful has a huge channel organization just to get the volume that you want in the software business. So we certainly have that as part of our growth plan.
Okay. So with that, look at the rest of the day and then the next couple of days. We're certainly looking forward to your feedback and advice on the things that you think we need to do to be able to win even bigger in the marketplace, and the things that we need to focus on that we may have a blind eye to, or something you see developing that's going to be important for us to be able to address. So we're looking forward to your comments and your feedback.
The agenda for the next three days is like this. Today we're going to be focused mostly on the TSG strategy, and also how we bring things together across our portfolios. So next you'll hear from Jack Novia and Andy Mattes about how we're really selling and delivering solutions, particularly these five Cs.
After that you'll hear a customer panel, and they'll tell you from their perspective how HP is working with them. And then finally we'll have a panel around the next-generation data center and let you see how these things are all coming together in terms of our capabilities and offerings.
On Tuesday, we'll have more detailed business-by-business discussions, and also a big part of the day for one-on-ones. And then Wednesday will be the deep dive tracks, where you can go into as much detail as you possibly can imagine on any particular topic across servers, storage, software and services.
Let me now hand it over to Andy and Jack. Andy Mattes is the sales manager on my staff on a worldwide basis. Jack Novia runs the Americas for me. And they're going to come and share with you how we're working today on some of the solutions associated with AE for our customers. Thank you.
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