HP – The Services Company

(By Anthony Miller – Wednesday 20th May 2009 9:30am). You really begin to wonder whether “The Street” has completely lost the plot on HP. With EDS firmly under its belt, HP’s services business is now its biggest revenue and profit generator in absolute terms (31% of sales, 38% of ‘raw’ profit). Yes, last quarter, the $8.5b of services revenues exceeded the $8.2b from PCs, and the $1.2b in services profits even outstripped the £1.0b from HP’s high-margin Imaging & Printing group. And how many questions did my ex-peers from the ‘Dark Side’ ask about services on last night’s concall? Just one. Old dogs and new tricks, eh?

Anyway, let me fill you in on some of the detail. There’s no point looking at yoy comparisons for HP services as they don’t break out the EDS contribution, but a quick look at the charts reminds us that EDS basically doubled the size of HP’s services business. So let’s look at the sequential growth instead, which includes EDS in full for both quarters.

HP’s services revenues declined 3% in the quarter to 30th April, to $8.5b, but margins continued to rise and are now 14%, ahead of IBM's. Good result! Worst hit was Application Services, where revenues fell 6% to $1.5b. Infrastructure Services revenues (the lion’s share coming from EDS and now 45% of the total) fell 3% to $3.8b. Technology Services revenues (basically maintenance) were roughly flat at $2.4b. BPO revenues, just 8% of the total, fell 5%.

It’s difficult to do a precise comparison with IBM as the service lines are aligned differently and so is the reporting calendar. But to give you the gist, in IBM’s Q109 (to 31st March), Global Technology Services revenues (infrastructure stuff) fell 9% sequentially to $8.8b, and Global Business Services (PwC stuff) fell 7% seq. to $4.4b. So in total, IBMs services revenues fell 8% seq. to $13.2b compared to the 3% decline in HP’s.

HP CEO Mark Hurd gave a fairly damning indictment on the famous EDS sales machine last night. “This is an organization that created most of its demand by picking up the telephone and hearing from a contract negotiator that a company was about to outsource”. He added that there’s still more work to do to align costs with revenues. As we mooted in Another top departure from EDS, it sounds like there are more departures to come.