Tuesday, 18 August 2009

HP Services miracle margins

(By Anthony Miller – Tuesday 18th August 2009 10:15pm). At first look, you just have to wonder how high they can go – HP Services margins, that is. In the quarter ended 31st July, HP Services operating margins stood at 15.2%, 2.3 pts higher yoy (pre-EDS) and 1.4 pts higher than the prior quarter. And yet “significant costs synergies for (the) EDS acquisition have yet to be realised” – even after cutting services headcount by 16,000. Services now generate 43% of HP’s profit, substantially higher than any of its other business lines. With margins now approaching Imaging & Printing’s 17.0%, at this rate Services will become HP’s most profitable business by any measure.

But let’s look more closely. I have yet to hear the detail from the concall to confirm how they are working this margin miracle, though I’m pretty sure the answer is that the profit numbers exclude restructuring costs. These totalled $362m in the quarter, four times higher than the prior quarter and virtually zero a year ago. If we assume that basically all the restructuring charges accrued to the EDS acquisition, then HP Services ‘real’ operating margin was 10.9%, still creditable but far more credible. I’ll let you know more after I have pored through the detail.

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