HP Software – shrinking fast

(By Philip Carnelley, 20 Aug 2009, 09:30) While the big story (for us) in HP’s Q3 results was in services (see HP 'Miracle Margins' Update), we shouldn’t overlook the news on HP Software. After all it is a multi-billion dollar business in its own right and ranks ninth in our UK software league table. HP’s software revenues fell a hefty 22% year on year to $847m – and now represents just 3% of the total. On the other hand, operating margins shot up 50%, to 18.1%, making it HP’s most profitable segment.

For comparison, in its most recent quarter, IBM’s software business was down 7%, with pretax margin up 8 points to 32%. Demand for IBM’s Tivoli and Rational software lines fell, but only 2%: together these are the most similar segments to HP’s BTO software subsegment, which accounts for two thirds of all HP software sales, and is down 22%. BMC (which also covers similar ground to BTO, and is of similar size) grew 3% in its last quarter and its operating margin reached 24%. So it’s not just market conditions – something’s not working very well. Perhaps HP's software managers are targeted principally on raising margins to competitive levels. They’ve certainly achieved that, just as margins were the strong point of the services business results. It is surely no coincidence that HP’s (much larger) enterprise storage and servers business also fell 23%. Yet software should have its own dynamic. It should benefit from growth in other areas (services). If HP thinks that its software business is important – and they have always said so – then they need to fix it!