HP CEO Comments on the Impact of Mercury Interactive Acquisition

Includes: HPQ, MERQ
by: Abbi Adest

Mark Hurd, Hewlitt-Packard CEO, President and Director, responded to a question about the prospects for the Hewlett-Packard's (NYSE:HPQ) software growth in light of its recent acquisition of Mercury Interactive (MERQ). Excerpts from their conference call transcript:

Keith Bachman - Banc of America Securities

I wanted to talk about Software, if I could, for a second. Mark, you had pretty good growth there. If you could talk a little bit about what the organic side was? The margin was a little less than I was thinking. If you could talk about the margin expectations you have before you consolidate Mercury, that would be great.

Mark Hurd

Keith, let me go back and start on the growth side. Growth was pretty similar across OpenView and OpenCall, so the organic growth was actually favorable across both of the different groups. So we got some benefit, of course, out of the Peregrine growth, but we had double-digit growth in both OpenView and OpenCall organically, so that was a good story, I think, on the top line across the board in software.

On the bottom line, which I think is an excellent question, I think you've got multiple factors. You've got the additional cost structure we're working through with the Peregrine acquisition; that's certainly part of it. Secondly, they do get an impact from the bonus that hits across the Company. So because of the size of their business, that had some materiality in the bottom line, because that business is very sensitive, with a few million dollars to the bottom line.

Then there is a slight bit of mix between the OpenCall factoring versus the OpenView factoring. So those are really the three drivers, when you net it out. I would say, if you balance those out, the business is roughly what we would have hoped for, from an operating margin perspective. It could have been a little bit better.

Long run, where am I expecting? I still believe a business of this scale has the opportunity to be in the 17% to 20% ballpark of operating performance. Again, as we've stated, I think when you look at the combination of Mercury and our Software business, we have an opportunity by the time we get to ‘08 to blend these businesses together and have a 20% operating margin business.