When the smoke clears from the restructuring that HP (HPQ) announced on Tuesday -- it will eliminate a net 3,000 jobs (shedding 9,000 but hiring 6,000 in other areas) over the next few years -- the company will have an additional $1 billion to invest in new initiatives such as cloud computing. It's the latest in a series of moves, such as the acquisition and integration of EDS, that will help push the computing company into higher margin markets.
HP is just one of many tech companies, such as SAP (SAP), that are investing in cloud computing. The idea is to move applications and computing power from the desktop to a shared network, known as the cloud. This will reduce costs and boost efficiency: Instead of buying 10,000 copies of a software program and having 95% of them idle at any one time, the company can buy 500 copies, which are in use all the time.
"A More Serious Competitor" in Cloud Computing
Some clouds are truly public and power applications such as Gmail or iTunes. Other clouds are private and limited to use by large corporations or other enterprises. Investments in this new architecture will account for a growing percentage of the IT market over the next few years -- 9% in 2012, compared with 4% in 2008, according to IDC. More importantly, cloud computing will account for 25% of the growth in IT spending during the same four-year period.
During a conference call on Tuesday, Raymond James analyst Brian Alexander noted that HP seemingly wants to be "a more serious competitor in the cloud."
HP Executive Vice President Ann Livermore explained during the call how cloud computing would fit into the company's enterprise strategy, which will receive an additional $1 billion in resources during the next few years. In HP's view, customers will want to consume its products and services in three ways: Traditional on-premises computing, outsourced computing, and services via the cloud.
"So we think one of the real differentiators for HP is going to be our ability to help clients with their services in all three ways. And certainly the cloud aspects of it are very important," she said. (A replay of the webcast is available at the company's investor relations page here.)
Open to Acquisitions
It's an important development for HP, which offers a mix of high- and low-margin products, ranging from corporate network consulting services to the calculator. It will help HP better compete with rivals such as IBM (IBM), Microsoft (MSFT), Google (GOOG) and Amazon (AMZN), all of which have incorporated cloud computing into their strategy. That list also includes Oracle (ORCL), even though its CEO, Larry Ellison, likes to describe talk of the cloud as "fashion-driven" computing. Given Oracle's acquisition of hardware company Sun, the company looks more like HP and IBM, offering a range of hardware, software and services.
Livermore didn't rule out the possibility of acquisitions to accelerate the company's resources in cloud computing. "As you know, we...look at M&A opportunities all the time, and around the cloud-services space, we'll certainly do [so]," she said. As cloud computing accounts for a greater percentage of IT spending growth, HP and other tech companies will have to establish leadership in the market.
Take the first steps to building your portfolio.View Course »