It’s clear that the EDS business is bringing a degree of stability to HP’s finances – even as the vendor plans additional cost reductions.
By John Madden
22 May 2009
With business down across its printing, PC and hardware lines, services was a noticeable standout for Hewlett Packard in its second-quarter earnings announcement recently. Granted, this time last year outsourcer EDS was not an HP company, and it’s intriguing to think about what HP’s services earnings would have looked like without EDS under its tent. Still, as speculation continues on when a global economic rebound will materialize, it’s clear that the EDS business is bringing a degree of stability to HP’s finances – even as the vendor plans additional cost reductions.
Additional EDS cost savings on the horizon
With EDS, services now generates about a third of HP’s quarterly profit. In an earnings conference call, HP executives acknowledged that EDS’s slightly more predictable and annualized revenue stream is helping to offset global weaknesses in its other, more commoditized, businesses which reported double-digit quarterly revenue declines.
Overall, HP generated net quarterly revenues of US$27.4 billion, down 3 per cent year-over-year (up 3 per cent in constant currency). Besides software, services was the only unit to report growth, with revenues of $8.5 billion for the second quarter, a 99 per cent year-over-year increase with EDS as part of the fold. The majority of that revenue, not surprisingly, was generated by Infrastructure Technology Outsourcing (ITO) with $3.8 billion. Technology Services generated $2.4 billon, Application Services netted $1.5 billion and BPO posted $709 million. (Post-EDS acquisition, HP altered the way it reported services revenue, so there are no year-over-year comparisons as of yet.)
HP also provided some news related to the ongoing EDS integration; namely, that the company has eliminated roughly half of the 25,000 positions detailed to go in its initial integration plan. HP maintains it is on track to achieve $2.5 billion in operational savings as part of that original plan. However, the vendor says it will realize an additional $500 million in incremental savings, starting in 2012, from real-estate consolidation – for total savings of $3 billion.
No details were provided on what facilities will be affected, including any data center-related modifications, but such consolidation was inevitable. HP is determined not to let global service delivery suffer as it integrates EDS and its facilities – and it will need to clearly demonstrate and communicate those intentions to customers as this process moves forward.
HP is not ready to say the worst is over in IT spend
Unlike some other IT vendor CEOs, HP’s Mark Hurd is not ready to say the worst is over when it comes to the plunge in global IT spending. From his perspective, business during the quarter was exactly what HP expected, though there were certainly some bright spots, such as the $1 billion EDS deal with UK-based insurer Aviva. Hurd thinks we’ll have a better understanding of whether corporate IT spending will rebound in late summer/early fall.
We think it’s a smart move for Hurd to provide this kind of tempered guidance to HP’s customers, partners and shareholders – and resist the urge to view some small signs of recovery as proof of a larger, imminent turnaround. The effects of the current spending slowdown will linger. For example, HP announced that, separate from the EDS integration, the company plans to eliminate an additional 2 per cent of its workforce – about 6,000 employees – during the next 12 months. HP did not detail where those cuts will be made. HP also refined its full fiscal year guidance, saying it expects a revenue decline of 4 per cent to 5 per cent, compared to its previous forecast of a 2 per cent to 5 per cent decline.
Hurd identified three factors that he believes will allow HP to emerge as a stronger company once the economy turns around: the vendor’s broad portfolio, efficient cost structure, and successful track record of execution. As Hurd said, “We like our chances, when the rebound does occur, to be a major participant in the market…because of what we’re doing right now.” We continue to be impressed with HP’s ability to cut and control costs. But until the global financial picture stabilizes, and we’re able to gauge how HP’s service delivery capabilities are ultimately affected by the ongoing headcount reductions, it will take some time to determine just how good HP’s chances really are.
