HP recently announced their results for Q4 as well as their results for the year. From my perspective as the Executive Director of TSIA, this is the technology services story of the year. Period. Throughout the year, we have been documenting the growing importance of service revenues and margins to product companies like HP. In an economic downturn, product companies benefit from a services buffer. As I predicted at the beginning of the year, this buffer was going to be critical to product companies of all shapes and sizes. For HP, services made all the difference in the world in 2009.
Impact of Services on HP Revenues
In 2008, HP had revenues of $118.3 billion dollars. The revenue breakdown for 2009 is shown below:
As can be seen, top line revenues dropped to $114.5 billion dollars. A relatively minor decrease of roughly 3%. Not bad in this crappy economy! However, if service revenues had not grown 65% in 2009, and simply stayed flat at $22.4B, HP revenues would have been down 13.5% for the year. If services had declined like Enterprise Storage and Servers, Imaging and Printing, and the Personal Systems Group, total HP revenues would have been down well over 20% for the year.
Impact of Services on HP Operating Profit
What is more amazing is the impact of services on HP operating profit. Even though HP services only represents 30% of total company revenues, services created 40% of the total operating profit dollars reported in the above diagram! Software remains the highest margin activity for the company. Next is imaging and printing. Remember when the business press stated that printer ink was keeping the company afloat? Look at the revenue and profit trends for this division as reported by HP:
Revenues and profits for this division are relatively flat. Contrast that with the trends for services:
In the not too distant future, it is reasonable to expect services to become the second most profitable activity HP pursues. Think of that—HP can make more money offering services than selling commoditized products. Did you ever think you would actually see the day?
Three Universal Laws
At the recent TSIA conference in Las Vegas, I discussed three universal laws that TSIA believes impact all enterprise product technology companies:
- There is an Inverse relationship between Moore’s Law and product margins.
- As technology markets mature, revenues and margins become services-centric.
- Product-centric companies contract in mature markets.
Look at the revenue and profit trends for core HP product businesses. HP is one of the largest and most diverse technology companies on the globe. And yet, they are not immune to these three laws. Just look at the numbers. If HP had not expanded its service capabilities, they would be a contracting company. Yet, this behemoth of a product-centric company successfully leveraged services to save the financial day. That’s why, from my perspective, this is the technology services story of 2009.