H-P's New Direction: Software

Last Tuesday's Wall Street Journal reported that H-P is planning to boost growth by bundling its various software offerings, including those of Mercury Interactive, and Bristol Technology.

The software in question is corporate-oriented systems management software. Allegedly, the effort didn't work well prior to this because it was not sufficiently important to merit H-P's full support.

Now, H-P has hired Thomas Hogan, former CEO of Vignette, a software firm, to lead the new effort. Focus is being placed on sales force training and compensation, to facilitate the success of the new endeavor.

Even with all this, I doubt this effort will re-ignite H-P to be a firm with consistently superior total return performance over several years.

First, while Mark Hurd has led H-P through a recovery from its malaise under Carly Fiorina, I don't think that the firm has, by any means, locked up the consumer laptop and personal computer market. It has enjoyed a short-term bounce in its stock price thus far, but I'm not sure it is poised to continue that consistently going forward.

Second, the Journal article notes that corporate customers are already migrating to online, "on-demand" software services, rather than the traditional type that H-P envisions selling.

Third, H-P is coming to the corporate software market long after many competent competitors have already settled in, such as IBM.

Fourth, there is the issue of credibility. I would think that commitment to a software vendor is a very serious issue, and H-P isn't really much of a presence yet in that world. This could take quite some time to pay off.

Overall, I think this new direction probably won't change the fortunes of H-P, which are heavily wedded to selling commodity computing and related hardware- laptops, printers, etc. Hurd has fixed some of the firm's earlier problems, but I do not think this necessarily presages a return to H-P's former days. As the Yahoo-sourced chart on the left depicts (click on it to see the larger version), over 40 years, the company has had some runs of clearly consistently superior returns. For much of the 1990s, and the early 1980s, the firm appears to have outperformed the S&P500. However, beginning in the mid-1990s, H-P's performance began to revert to average and/or inconsistency.

Over the past 5 years, as shown in the chart on the left, H-P hasn't really outperformed the index until the last 20 months or so. Hardly a long-term return to consistent superiority. Based upon my proprietary research findings, H-P's recent performance is far from sufficient to merit ascribing to it long-term outperformance of the index. Even three years of relatively high total returns is no solid predictor of consistent outperformance of the S&P.

So, I think it remains to be seen whether H-P can even be a high-growth, long-term consistently superior total return company again, going forward. As I have written in prior posts, creating a successful second act for a technology company is a nearly-impossible task to achieve.