HP, WSJ, OMG

I just reviewed HP’s earnings release. The company met Wall Street expectations but both product revenues and net operating profits were down. This trend is right in line with what we saw in the Q2 snapshot of the Service 50, so HP’s results are clearly not atypical. I also scanned the rash of articles that came out from the business press discussing HP’s numbers, including this gem from the Wall Street Journal:

Good Question: How Has EDS Helped H-P?

These articles agree that services was THE ONLY business line to grow for HP over the past year. However, the business press is bemoaning the fact that it is difficult to compare service revenues from one year ago because of the EDS acquisition. There is also some question about the profitability of the overall service business for HP and how it compares to IBM’s services business.

I’m sorry, as product revenues take a double digit hit and product margins get skinnier (think netbook margins vs. laptop margins), I would argue there are three key facts that are most relevant when discussing the impact of services on HP:  

  1. Services revenues are 93% larger than they were one year ago
  2. Services now represent 31% of HP’s total revenues.
  3. Services are responsible for 40% of HP’s total earnings from operations.

Clearly, the future of HP services includes improved profitability.

Hopefully for HP, EDS services can open doors for HP product sales.

Maybe, somewhere in the future, all of the products “HP invents” will be consumed through service transactions such as software as a service, cloud computing, managed services, or outsourcing services.   

For the here and now, if services would have followed the same trajectory of the product revenues, HP’s top line revenues would have been $22.8B this past quarter, not $27.9B. This means instead of hitting 98% of revenues compared to one year ago, HP would have only captured 80% of revenues compare to one year ago. If that was the case, the headline in the business press would have been much more direct:

HP REVENUES DECLINE 20%

What does services mean to HP? Many things, including keeping the above headline out of the business press.

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