EDS and Services Stabilise HP’s First Quarter

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Services are where the smart money is during this recession as more companies look to outsource rather than invest in new computer hardware. HP’s most recent quarter is a case in point.

Hewlett-Packard has shown its resilience in the wake of the ongoing recession – until now.

The bad news is that demand for PCs is down and is expected to stay down in 2009. The good news is that services appear to be remaining resilient for HP, making HP’s EDS acquisition last year seem like an even smarter bet than some originally thought.

And for solution providers that have been on the fence about getting into the services market with a managed services (MSP) or software as a service play (SAAS), the recent HP experience provides one more bit of evidence about the benefits of making such a move.

Computing and IT services giant HP last week reported revenue of $28.8 (£19.74) billion, a 1 percent increase in revenue from the year ago quarter, but less than the $31.9 (£22.34) billion analysts had been expecting, when it announced earnings last week.

“After a strong year-end finish, HP’s recent first-quarter earnings showed how the turbulent economy finally caught up with one of the most fiscally-disciplined IT companies in the market,” says John Madden, principal analyst at Ovum, in a report issued this week.

“With year-on-year drops in all lines of business but services with EDS, HP is continuing its ongoing cost-savings plan while implementing newer efforts such as company-wide salary reductions,” he adds. “The vendor is counting on these moves, along with customers’ increased appetite for cost-efficient outsourcing through EDS, to maintain its balance.”

Net earnings at HP declined to $1.8 (£1.26) billion from $2.13 (£1.5) billion during the same period a year ago. Net earnings per share were 77 (54p) cents compared to 83 (58p) cents during the same period last year. Net earnings during the Q1 included charges related to the EDS acquisition and restructuring. HP says non-GAAP net earnings totaled $2.28 (£1.59) billion compared to $2.29 (£1.6) billion for the same period a year ago.

HP’s Personal Systems Group (PSG) reported a revenue decline of 19 percent to $8.8 (£6.17) billion with unit shipments down 4 percent. Desktop revenue fell 25 percent, and notebook revenue fell 13 percent. Consumer client revenue decreased 18 percent.

HP’s Imaging and Printing Group (IPG) reported a 19 percent revenue decline to $6 (£4.2) billion. Supplies revenue fell 7 percent while commercial hardware and consumer hardware revenue declined 34 percent and 37 percent respectively, according to HP. Printer unit shipments decreased 33 percent.

Enterprise Storage and Servers (ESS) revenue fell 18 percent to $3.9 (£2.73) billion. Storage revenue dropped 7 percent with the midrange EVA product line down 7 percent. Industry Standard Server revenue and Business Critical Systems revenue declined 22 percent and 17 percent respectively, while ESS blade revenue grew 4 percent.

Services revenue increased 116 percent to $8.7 (£6.1) billion, primarily due to EDS’s contribution. HP says that revenue in Technology Services was flat.

HP Software revenue declined 7 percent to $878 (£615) million.

“While it was clearly HP’s toughest financial quarter in years, the reality is it could have been much worse,” says Madden. “CEO Mark Hurd and his leadership team had been cracking the whip of fiscal discipline long before the recession forced many other companies to take up such behaviour. Even prior to the EDS purchase, when HP reported record revenues, Hurd demanded greater cost justification and controls throughout the company; it just made good business sense.”