HP Results:The Services Story of 2009

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:

HP Revenues 2009

 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:

Imaging and Printing Group 2009

Revenues and profits for this division are relatively flat. Contrast that with the trends for services:

HP Services 2009

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:

  1. There is an Inverse relationship between Moore’s Law and product margins.
  2. As technology markets mature, revenues and margins become services-centric.
  3. 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.

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2 Responses to “HP Results:The Services Story of 2009”

  1. Bob Westerkamp Says:

    Thomas,

    Good blog! However, the HP top line services revenue clearly benefited from the EDS acquisition. At the time of the acquisition the combined companies had a service revenue stream of $38 Billion. In 2009 the revenue was below $36B. So like most technology firms, HP experienced a slight decline in service revenue while improving margins – the improvement in margins is largely due to the elimination of redundant costs that existed as a result of the merger.

    Mark Hurd and HP definitely get credit for turning a product dominated firm into one with a better service to product mix. On the other hand I am not so sure that the service performance of HP was any more remarkable than that of many other firms.

    • Thomas Lah Says:

      Robert:

      No doubt the EDS acquistion was the engine for the increased service revenues and service margin dollars. Just a few months ago, The Wall Street Journal and other business venues were questioning the benefit of the EDS acquistion to HP. My point is that the EDS acquistion and the ability to generate more service revenues was the defining factor in HP’s financial stability in 2009. What newpaper or business magazine is writing that story? And why not?

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