HP pushes more work to Mphasis

(By Anthony Miller – Thursday 20th August 2009 9:45am). As ever, Mphasis’ quarterly results add useful ‘colour and movement’ to HP’s numbers (see HP Services miracle margins), by shedding light on the company’s India-based offshore operations. TechMarketView subscription service clients can get the background to Mphasis in our OffshoreViews note HP/EDS India – a Game of Two Halves, so I will stick to the present.

The first thing you’ll notice if you delve down into Mphasis’ report is that its ‘direct to client’ revenues are down 25% yoy and now represent 29% of the $229m quarter total. This means that over 70% of Mphasis’ business now comes from HP/EDS, compared to 55% a year ago. But it’s where the increase in HP/EDS-related revenues comes from that really caught my eye. A year ago, essentially all of Mphasis’ ‘related party’ revenues came from EDS US. Today, EDS US accounts for just 60%, with EDS UK now responsible for 16%, and other parts of HP/EDS, 24%. In other words, since acquiring EDS – and hence majority control of Mphasis – HP has been pushing work from other regions to India.

Another point you’d notice is that BPO represents about 17% of Mphasis’ revenues but is its least profitable service line, with 21% gross margins, vs 44% for IT outsourcing and 32% for AD&M. It’s BPO that HP is apparently mulling divesting (see HP 'Miracle Margins' Update).

Finally you look at Mphasis overall operating margin at 22%. Compare this to HP Services 15% (adjusted, of course). Obviously you have to take care when looking at Mphasis’ financials when the majority is ‘related party’ business, but you get the picture. So if HP really is to sustain, if not expand, services margins, Mphasis could be the key. But, with HP Services' revenues at $8.5b in the quarter, it's a very small key in a very big lock!