Can the momentum continue?
By John Madden
27 Nov 2008
As expected, HP this week announced solid fourth-quarter and yearly earnings (for the quarter and fiscal year ending 31 October 2008). Still in the throes of fully integrating outsourcer EDS, HP is effectively demonstrating how its financial discipline is paying off at the bottom line, and that the vendor is as prepared as possible to weather whatever happens economically into next year. Company leaders, not surprisingly, are also sounding a bit cautious, perhaps mindful that no amount of preparation may be enough to prevent an impact.
Fiscal controls will deliver benefits in the long term
As other IT vendors offer dire predictions on IT spending next year, HP not only delivered strong quarterly and yearly results (which the company pre-announced), but finds itself in a position where it is able to guide 8–10% growth in its next fiscal year. This includes the (with hindsight) impeccably timed acquisition of EDS. However, the company clearly acknowledged that economic conditions will remain difficult for the foreseeable future. However, the company clearly acknowledged that economic conditions will remain difficult for the foreseeable future.
In an earnings conference call with analysts, CEO Mark Hurd acknowledged that customers are “prudent thinking about what they spend money on,” but remained confident that HP’s global fiscal controls and disciplines can allow it to hit its financial targets. Some might say that such views are overly ambitious given the ups and downs of the global economy. However, it’s important to remember that HP is in the midst of a massive multi-year plan to eliminate 24,600 jobs in total post-EDS (some 2,300 have already been eliminated so far). HP also continues to drive other global efficiencies that in aggregate it expects will deliver at least $1 billion in cost savings next year.
HP also has the added advantage of being a global, diversified firm, with standardized systems and delivery models. This global benefit was apparent in HP’s earnings: revenues from outside the US in the fourth quarter comprised 68% of total revenues, with growth in EMEA of 22% year-on-year (15% in constant currency, 3% excluding EDS); Asia-Pacific grew 14% (12% in constant currency, 6% excluding EDS). The US grew by 17% but contracted slightly excluding EDS.
Expectations remain high for EDS integration
Many of HP’s enterprise customers, not to mention investors, are eyeing the ongoing EDS integration – and at this point there’s little evidence that the integration is distracting from HP’s ability to deliver solid financials. We know from conversations and briefings with HP and EDS officials that plans to integrate portfolios, sales teams and marketing resources globally continue behind the scenes. According to Hurd, HP’s extensive integration plan is on or in some cases ahead of schedule. In EMEA, for example, EDS’s 200 largest accounts, which account for around 70% of revenues, now have integrated HP/EDS sales teams approved by the clients. As an indication of the complementary nature of the combined client bases, the company claims that only 17 of these 200 accounts were “substantially common” to both companies.
Hurd told analysts that post-acquisition EDS is providing HP with “a chance to compete that we just didn’t have” in services and outsourcing deals. We agree that customers’ current focus on cost reduction plays well into HP’s overall value proposition of lowering costs either through technology (server blades or management software) or services (infrastructure and applications outsourcing from EDS). However, it’s still unclear how the economy will ultimately impact pricing, contract size and recurring revenues for all IT services vendors going into 2009. On the pricing front, we should note that HP is one of only a handful of IT vendors with its own financing arm – which could prove a valuable asset as customers look for more creative (read: available and affordable) ways to finance their IT investments.
Including two months’ worth of EDS revenues (i.e. from the acquisition date of 26 August to year-end 31 October), HP Services (HPS) reported a doubling of its revenues to $8.6 billion, $3.9 billion of that from EDS. HPS’s operating profits for the quarter were 10.6%, down 1.2 percentage points.
Excluding EDS, HPS’s revenues overall grew 10% year-on-year, with revenues in Technology Services (TS) and Outsourcing up 10% and 15%, respectively. Hurd pointed out that the increase in TS revenues was driven, in part, by HP improving on its services attach rate with HP hardware and software sales. Consulting & Integration (C&I) revenues, meanwhile, grew only 2% from a year ago.
