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Software 2007
Santa Clara, California
May 8, 2007

© Copyright 2007 Hewlett-Packard Development Company, L.P.
All rights reserved. Do not use without written permission from HP.

M.R. Rangaswami (Software 2007 Conference Organizer): Next up on the agenda is someone who has been at this event before. Shane Robison has a unique job at Hewlett-Packard. He was at HP in the old days, he’s there in the new days under Mark Hurd, and he’s got a very unique role in that he is the Chief Strategy Officer of the company and also the Chief Technology Officer. So it’s a great position to be in to bring everything together at this company. I believe HP is about a hundred billion dollar company at this point. In his dual role, part of Shane’s charter is pull everything together and drive alignment across the company. And Shane has been one of the biggest proponents of software within Hewlett-Packard. So ladies and gentlemen, please welcome Shane Robison.

Shane Robison: Good morning, everyone. As M.R. mentioned, I was here a couple of years ago. A lot has happened in the software industry in those two years, and a lot has happened at HP, much of which played out in the press. The press, this morning, probably does a better job of giving you a feel for some of the good things that are happening at the company. So it’s a great time to be here and give you an update.

What I’m going to do is tell you about three things. First, I want to explain software at HP. So we’ll focus on what we’re doing inside the company. And second, talk a bit about some of the shifts that we’re seeing in the software industry in general. And then finally I want to touch on SOA since it’s such a hot topic.

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Software is central to everything we do at HP
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It’s important for people to understand that software is really central to everything we do at HP. It’s important in that it’s embedded in many of our products. Simply put, it makes our products work. We also have software that we ship with our products. It differentiates us in the marketplace. Our strategy is still to build our solutions and our products on industry-standard building blocks and then differentiate those products in the marketplace using software that enhances their capabilities and simplifies the user experience. We sometimes refer to that internally as widget frosting but that doesn’t do it justice -- it’s a very, very important part of our portfolio.

And then we have software in the form of our stand-alone software business. And I’ll talk about that in more detail.

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Across every HP business, software is how we solve customer problems
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Here’s how we think about it: This gives you a view of what software looks like structurally inside the company. It crosses every business group. So software is how we solve customers’ problems in the Enterprise, in Consumer, in SMB, in our PC business, our Enterprise Server and Storage business, and our Printing and Imaging business.

To give you a feel for how we approach this on the enterprise side: There’s a lot of software that’s coming from inside the company. Dynamic Smart Cooling is an example. This is software that came out of HP Labs that addresses the most critical problem in the next-generation data center, which is how do you manage power and cooling? The top concern for customers is really moving away from a focus on speeds and feeds. Now that we’ve got these incredibly densely populated data centers, how do we get enough power in and enough heat out? There’s a lot that we can do with software solutions that help us manage that. So really interesting stuff happening in that area.

We’ve done a lot to expand and accelerate our software business. With the acquisition of Mercury, we doubled our business in one move. We also acquired some very strategic assets in terms of test and development of enterprise application software. Mercury also brought to HP industry leading software and capabilities in the area of Business Technology Optimization, or BTO. More on BTO in a moment.

Neoview. This is taking some assets that have been in the company for a long time in the Tandem NonStop business unit and really moving them to an industry-standard platform, where we can take advantage of that software solution in highly reliable, scalable business warehouse systems.

Imaging and Printing. This is one that I think a lot of people sort of miss. There’s some great stuff going on in Imaging and Printing. Logoworks is the leading web-based graphics design service provider. We just acquired them very recently, and they’re going to continue to target creative professionals designing things like logos for Web sites.

Snapfish. Snapfish is a very important part of our overall portfolio. It’s both a destination web site for storing and sharing your personal photos and memories. But it’s also a platform that we’ve used to serve businesses like Wal-Mart and Walgreens, allowing them to deliver photo services under their own brand. So Snapfish is a web-services platform that’s been very successful for HP.

And then there’s Tabblo, which we just acquired a couple of months ago. Tabblo is really about making the web printing and production experience easier and more seamless for end users.

When you study the printed pages today as we do inside HP, you discover that more than 50 percent of the pages printed today are printed from the Internet. So one thing we know we need to do as a company -- and this is all software driven -- is go out and make the experience of printing from the web more intuitive. There’s a lot of focus on that inside the company.

In our Personal Systems Group, Bitfone was an acquisition that we made recently which is all about managing remote devices. We all know that if we lose our iPAQ -- I won’t use the word Blackberry -- a lost device is a crisis. We need to be able to either reprovision it or shut it down, so that we can protect that information. In other situations it’s not that you lost the device -- instead you just want to use it in new and different ways or perhaps you want to push information to your sales force. Applications like Bitfone allow us to really extend the use model into a much more services-oriented play.

QuickPlay. This is a good example of software embedded into our products. QuickPlay actually started out as a Linux application on many of our DVD portables. It allows you to watch a DVD right away without having to boot up the entire operating system. So it’s an instant-on entertainment experience. It has been a huge differentiator for us and very popular with customers in the consumer space.

And then there’s TouchSmart. I don’t know how many of you have had a chance to see the new TouchSmart PC that we announced at CES, but this is a whole new user interface that gives customers an easy, intuitive, walk-up-and-touch interaction. TouchSmart allows you to select everything from your photos, your music, your videos, your Internet applications -- all of your personal information -- in a very easy and intuitive way. This is application interface software developed by HP.

So that gives you a feel for how we think about software across the company.

Now I’m going to talk a little bit about yesterday vs. today.

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HP’s $3.6B R&D investment
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Our internal R&D investment is pretty big -- $3.6 billion -- and we’re one of the few companies in the world that still invests heavily in the “R” part of R&D. Just three or four years ago, that investment was roughly 30 percent dedicated to software and about 70 percent in hardware. As we’ve really executed our strategy of developing our products and services based on industry-standard hardware differentiated in the marketplace with software -- we’ve shifted that mix of internal investment. Today we invest about 70 percent of our R&D budget in software and 30 percent in hardware/. So a pretty big shift.

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HP’s M&A strategy
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For many years, we had a laser focus on HP OpenView in our stand-alone software business. That was also the focus for the acquisitions we were making a few years ago. Today, as you could see from what I talked about earlier, we have a much broader focus that drives our acquisition strategy. We’ve made 16 major strategic software acquisitions in the last three years, across all those categories that I talked about a moment ago.

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HP Software business unit
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Our Software business unit used to be primarily focused on management software, including element management, all the things that you’re familiar with in OpenView and Open Call.

Today, it’s really about Business Technology Optimization. And with the acquisition of Mercury, we’re about the sixth largest software company in the world, according to IDC. So we’re a serious software company by almost any measure. Today, we think there’s a new category emerging in software, and it’s called Business Technology Optimization. And we think BTO, as a category, is going to be as important as database or ERP or some of the other major enterprise categories. And to us, what BTO really does is it aligns your business infrastructure with your business processes, and allows you to automate and virtualize your assets and facilitate a much easier use model.

So that gives you a quick view of how we think about software inside the company. Now let’s shift to our view of what’s going on across the software industry as a whole.

There are some big shifts that we see, and these are not in priority order. I think they happen in parallel and I think many of them will be things that you can resonate with.

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Then: Consumer vs. enterprise software… Now: Convergence of consumer and enterprise software
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Until recently, there was a big distinction between consumer applications and enterprise applications. So consumer and enterprise software were two very distinct and different categories. Today, I think we’re seeing a convergence of consumer and enterprise software. So mashups become composite applications in an enterprise context. Social networking becomes a business collaboration tool. And the list goes on. This has big implications for everyone in the software industry.

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Then: Clear distinction between hardware vs. software… Now: Blurring of the line between hardware and software
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Yesterday, there was a clear distinction between hardware and software. Now there’s a blurring of the lines between hardware and software. Virtualization really changes the way we look at hardware and software. And the old distinctions are becoming much, much harder to even find. Virtualization allows you to use software to create virtual systems that are indistinguishable from the hardware - in other words, making the hardware architecture itself much more transparent.

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Then: Software is about individual productivity… Now: Software is about communication and collaboration
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Yesterday, software was about individual productivity. Like many of you, I’ve been in the industry a long time. I was at Apple when we were rolling out desktop applications: word processing, spreadsheets. Today, software is really about communications and collaboration. That doesn’t mean productivity is less important. We still need great productivity apps, but I think a lot of the focus and a lot of the new innovation is happening on the communications and collaboration side.

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Then: Big challenge: Connecting devices to the network… Now: Connecting users to services they value
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Yesterday, we were very focused on connecting devices to the network. Today, the focus is on connecting users to services. There’s a huge demand for this always-connected experience and the ability to access information any time, anywhere, from any device. And it applies both to our personal lives and to our business lives. So we’re very focused on this across HP. And it actually requires the whole portfolio to deliver it. You need the backend server architectures and storage to serve up the information that you want to get at with your mobile devices. And the connection there is all provided by the definition of the service.

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Then: Software developers spent time writing code… Now: Software developers are business consultants
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In the past, software developers spent an enormous amount of time writing code. Today, software developers are business consultants. In the world of SOA, the days of writing lots and lots of code should be fading. If you’re a developer and you’re still spending the bulk of your time writing code, then you need to rethink that. Because functionality has become modular and reuse has becomes the method for development. So the developers’ value today lies in reusing modules that are available and in creating software that’s aligned with the business processes in the target applications.

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Then: IT supports the business… Now: IT powers the business
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In the past, IT was there to support the business. Today, IT isthe business, particularly in many of the new software-driven companies. So this mindset is really fundamentally changing. And I think financial services and that whole industry has led the way with some of the new service-oriented architecture rollouts that are happening in that space.

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Then: SOA hype high, adoption low… Now: SOA takes root, presenting execution challenges
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Now let’s switch to topic “A”, which is SOA. In the past, it’s mostly been hype. Today, it’s taking root and it’s presenting some incredible opportunities and also some challenges. Many of will remember: 2005 was declared the year of SOA. It didn’t really happen at that time. Then 2006 was named the year of SOA. It’s slowly been building momentum. And I think this year, SOA is really starting to get traction in the industry.

So we’re at a critical juncture where the hype really turns into reality. And as that happens, customers are very focused on modularity. Standard business services are replacing the APIs that we’ve all known in the past. Things get implemented once and reused. IT changes are actually decoupled from business changes and business process changes. And everything will be delivered through services.

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Then: HP is a hardware vendor… Now: HP is serious about software
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So to wrap up: In the past, HP was viewed as a hardware vendor, probably a reasonable perspective. It’s not reasonable today. HP is very serious about software. And as I said, software is part of every dimension of our business and it’s a very important business in and of itself inside HP. So there’s a lot of good things happening and a lot of new software that you’ll see coming out from HP over the course of the next few months and years.

So with that, thank you for listening. I hope you enjoy the rest of the conference. I think we’re going to have a short Q&A.

M.R. Rangaswami: Two years have gone by. Man, time flies. Twenty-four months ago, HP really wasn’t even counted in the software category. Today, like you said, fifth or sixth largest vendor. Why this transformation? You could have gone many different ways. You could have gone into consumer devices. You could have gone into more hardware. You could have done all kinds of things. What’s Mark Hurd’s thinking in all this as well, because obviously he comes from the enterprise space? So what’s transpired within the company in the last two years to make this bold move?

Shane Robison: When we were here last time in ’05, we talked about our strategy and what we needed to do. In the last two years, simply put, we’ve executed the strategy. And that strategy is to build software capabilities and a software business as the key differentiator for HP products and services. We’re building a software stack that we can wrap services around that’s focused on addressing enterprise customers’ problems, addressing consumer opportunities, and really automating small and medium businesses. So a lot of what we’ve done is pretty simply execute what we said we were going to do.

M.R. Rangaswami: So you’re taking it to the next level. And you’ve got OpenView and you’ve now got Peregrine and you’re building up a lot of things in the systems management and asset management space. So can we expect HP to move up slowly and get into app server, database applications? I mean what should we expect over the next few years?

Shane Robison: Well a big part of our strategy that I didn’t mention is to be very clear about where we’re going to invest and where we’re going to partner. SAP is a great partner for us and we will continue to partner with them. We partner with Oracle. We partner with Microsoft. And those are not areas where we’re going to invest. We’re really investing in the Business Technology Opimization space on the enterprise side, which is all about how do you automate and integrate a complete solution and deliver it through services. Many of the components of that solution will be provided by our partners, and we’ll be able to leverage their investments in R&D as we go along.

So I don’t think you’ll see us going out and doing databases that compete with Oracle or applications that compete with SAP. That’s just not consistent with our strategy. We really want to partner effectively. We’re not assuming that it’s going to be an all-HP stack. But how you manage that stack is where we really focus our energy.

M.R. Rangaswami: So in terms of acquisitions, I know you’ve made bold moves like with the Mercury acquisition and so forth. So what do you look for? I mean we have hundreds of companies here who probably would love to talk to HP. What do you look for in an acquisition? What are some of the characteristics?

Shane Robison: Well it’s a pretty simple formula. It needs to fit our strategy. So we’re not going to go off into a space that puts us in a position that compromises our partnerships. We are looking for good software companies, and by good, I mean software companies that are making money, have momentum, are on the leading edge. A lot of it is about the people.

My view on software companies is if you get a great team, and if you’re in an M&A discussion, they’ve already demonstrated, typically, that they can execute well and that they are creative and innovative. And it’s not much more complicated than that. We’re very focused on supporting our Printing and Imaging business so that we can continue to enhance our capabilities there as we move up into the enterprise. We’ve done acquisition like Scitex and some of the other enterprise printing acquisitions. We’ll continue to look at that. Information management. Business Information Optimization is a big area for us as we continue to roll out our Neoview platform.

So there’s a lot of flexibility in what we do, but it needs to be consistent in the enterprise space with BTO, in our Printing and Imaging business with either enhancing our capabilities on the web with things like Tabblo and Snapfish, or going into the enterprise printing space. And on the personal systems side, we really are making great progress with our mobility strategy which is all about this always on, always connected, anytime, anywhere experience. So anything that enhances that is something that’s of great interest to us.

M.R. Rangaswami: Now you have to balance this. Obviously we’ve talked quite a bit about HP acquiring businesses, which is more the consolidation, in a sense, strategy of some sort. But on the other hand, how do you balance? You’ve been very efficient in the last two years. As a company, you’ve made more profit. You have rationalized your workforce. How do you balance that with innovation and growth?

Shane Robison: They’re both very important. And I think one of the things that I have to be sure and emphasize is just the sheer size of our R&D investment -- $3.6 billion in R&D. And if you think about it, as you shift from a hardware mix to a software mix, you get a lot more out of that R&D investment. So even if we kept it flat, productivity and efficiency would be better because you’re shifting to a more software-oriented R&D, which is not as capital intensive. So we can do more with the same amount of money.

We’re going to continue to do that. We have a world-class research lab. And we just announced a new research lab director who we’re very excited about, Prith Banerjee, coming from the University of Illinois. And you know there are very few companies who invest in the R, the three- to five-year out exciting stuff. And most of our research has shifted to software and the technologies that automate our service delivery.

So I think it’s important not to lose sight of the amount of internal innovation that we have going on. We just had an internal technology conference. The technology community at HP is about somewhere between 30,000 and 35,000 people worldwide. And we have a conference, about the size of this, that we do every year, and you have to compete to attend the conference. So you have to write papers, and it’s a pure meritocracy where you’re judged by your peers on the quality of your work. And then we bring the best-of-the-best together. So out of that 35,000 people, 700 people get to go. So we get the best-of-the-best every year.

Now the interesting thing is -- and this speaks to how much innovation is happening in the company -- because the reviewers are really focused on “Are these new original ideas?” This is the fifth year we’ve had the conference, and this year, over 50 percent of the people were first-time attendees. So that means they were there with fresh, new ideas and fresh, new innovation. So there’s a huge amount of innovation happening inside the company.

M.R. Rangaswami: And do you have things like Fellows and other ways of distinguishing researchers?

Shane Robison: We have Senior Fellows and Fellows. We have what is now becoming really a sort of well-established dual-career path. So if you’re a software engineer or a hardware engineer, although we don’t have as many of those anymore, and you want to advance your career all the way up to Senior Fellow, which is equivalent to Vice President in every way -- compensation benefits, all that stuff -- you can do that on the technical ladder without going into management if you choose to take the pure technical path.

It’s been interesting because, as we bring in companies like Mercury and Peregrine and Knightsbridge and some of the other new acquisitions we’ve made, they find this technical career path and they go, “Wow! This is really good.” So it’s great for the technology community.

M.R. Rangaswami: So in terms of the company itself five years from now, I think if I do the numbers right, today, maybe 5 percent, 6 percent of your revenue is attributable to software?

Shane Robison: Yes.

M.R. Rangaswami: Maybe something like that.

Shane Robison: Something like that.

M.R. Rangaswami: Give or take a percentage or two.

Shane Robison: Yes. I’m always careful when I’m in a quiet period, as we are now. So I’m not saying much on those.

M.R. Rangaswami: So five years from now, how do you see that shift?

Shane Robison: Well I think you’ll see the software business grow nicely. I mean, we’ve got some very aggressive plans for it. But the important thing is to go back to what I said in the beginning. We will have more embedded software. We will have more software delivered with our products -- the widget frosting piece, which differentiates us in the marketplace in multiple ways.

And then at the same time, we’ll grow our software business. We’ve brought in a world-class executive, Tom Hogan, to run this group as we bring it together. And we’ve got very aggressive plans for growing that business.

M.R. Rangaswami: Great. Well, Shane, thank you very much and I hope you come back.

Shane Robison: Thank you. Take care.

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