HP's dire results highlight importance of services

Will there be a 'flight to quality' IT or a flight from spending anything on IT?

Hopes that HP's latest financials might show signs that the worst of the downturn was over were dashed this week when the technology bellwether turned in a pretty rotten set of figures.

Revenues declined three per cent year on year, to $27.4bn in the three months to 30 April 2009, compared with $28.3bn in the year ago quarter. HP pointed out that, adjusted for currency fluctuations, revenues actually rose by three per cent year on year. However, this bit of spin is unconvincing as it ignores the company's $13.9bn acquisition of IT services heavyweight EDS last year. Once the addition of EDS’s revenues are discounted, HP's performance looks much worse.

Profits at the firm dropped 17 per cent, to $1.7bn compared with $2.1bn in the year-ago quarter.

While the EDS acquisition helped boost services revenues by 99 per cent, to $8.5bn, other important parts of the business fared poorly.

Enterprise Storage and Servers revenue dropped 28 per cent to $3.5bn, Personal Systems Group revenue declined 19 per cent to $8.2bn, and the Image and Printing Group recorded $5.9bn, down 23 per cent. HP Software revenue declined 15 per cent to $880m, while HP Financial Services reported revenue down six per cent to $641m.

"Any company that's saying everything's bright and the future's really fantastic – well, people will be looking at [HP] and thinking: which planet are you on?" said Quocirca research director Clive Longbottom.

"It’s intriguing to think about what HP’s services earnings would have looked like without EDS under its tent," said Ovum principal analyst John Madden, in a research note.

In a conference call to announce the results, chief executive Mark Hurd said there would be another two per cent cut to HP's workforce worldwide, but gave no indication about where the axe would fall.

And HP managing director for Europe, the Middle East and Africa Francesco Serafini admitted that there was little cause for optimism in the coming months. "If I look at Europe as a whole, I expect the same sort of market for a couple of quarters," he said.

Nevertheless, HP’s UK & Ireland vice president and managing director Steve Gill was more bullish about HP's prospects: he believes that the downturn will favour big vendors.

"Firms out there are thinking long and hard about where to place their business. There's a slightly awful phrase, 'flight to quality', being used and there's about six firms with global reach and who have put in a strong financial performance – and we're one of them," he said.

Despite the problems in the hardware, printer and software divisions, the EDS acquisition is looking distinctly prescient.

"HP as well as being a big hardware company, is now a big services company, and they need to be playing the services card far more heavily than the hardware card," said Longbottom. "The rip, replace and repopulate model of datacentre outfitting is dying – there's so few of those happening – you can't base your future on that."