Monthly Research Update

Experton Group Weekly IT News

HP Strategy, Oracle Financials

By: Cal Braunstein

Hewlett-Packard Co. (HP) revealed it was cutting its workforce by 24,600 and laid out its strategy. In other news, Oracle Corp.. reported strong first quarter financial results and offered its view on its upcoming second quarter financials.

Focal Points:

• Now that the EDS acquisition is behind it, HP announced it was cutting its workforce of 320,000 by 24,600 or 7.6 percent over three years. The company stated it was doing this to drive efficiencies and eliminate redundant positions. In addition, the company is taking a one time charge of $1.7 billion in its fiscal fourth quarter (which ends October 31st) to handle the integration of EDS's operations. Officials stated they expect the restructuring to result in annual cost savings of $1.8 billion. CEO Mark Hurd expressed he focuses on driving efficiency first, and that the revenues will follow, as HP has had more services opportunities than it could handle previously and will now be able to pursue. He also pointed out that there was little overlap in the top 100 accounts of the two firms, which he sees as a significant opportunity for engagement. Executive VP Ann Livermore commented that IT expenditures in fiscal year 2005 were about four percent of revenues and that they will drop to about two percent in the upcoming fiscal year.
• Executives also explained the company's strategy for the business market. There are four major challenges CIOs are facing and HP expects to satisfy in its quest to be the leader in IT innovation. The first is the reduction of IT spending on operations so that the majority of the IT expenditures are invested in innovation. The second CIO challenge is the need to transform their data centers that constrains growth with next generation solutions architected to be highly available, flexible and energy and space efficient. Virtualization is seen as the third challenge, and the need to effectively handle the explosion of information is the final hurdle CIOs must address. HP executives expressed the company is well positioned to meet these customer problems with its products and services, and with solutions that can be owned, outsourced, or handled via cloud computing.
• Oracle reported its first quarter revenues increased 15 percent year over year to $5.33 billion. Fiscal first quarter profits jumped 28 percent while net income on a generally accepted accounting principles (GAAP) basis rose to $1.08 billion from $840 million in the year ago quarter. Total software revenues were up 20 percent to $4.2 billion with new software license revenues up 14 percent to $1.2 billion. Software license update and support revenues grew 23 percent to $2.94 billion while services revenues gained nine percent. Oracle expects second quarter new license sales to grow by five to 15 percent. Executives were unfazed by the current market turmoil and predicted customers would not cut Oracle from their budgets.

Experton Group believes HP is now well positioned across its products and services lines to challenge IBM Corp. but it will take at least six months before HP can demonstrate it can effectively drive this strategy in all segments. The consensus amongst the major hardware and software providers is that the market turmoil will have limited impact upon them and that it represents sales opportunities. Additionally, Experton Group expects the market uncertainty will impact smaller players and represent acquisition opportunities for the well-financed major players. IT executives should talk to their strategic hardware and software providers about how they can assist the enterprises in achieving their goals through financing. HP, IBM and others have financing arms or relationships that can be used to help obtain the capital needed to transform their data centers, while preserving corporate capital for revenue generating purposes.