HP Q3FY10 Highlights
- Excluding EDS pre-acquisition revenues currently gives HP an ‘easier compare’
- HP’s Q209 decline of -2% would be more like –18% if EDS revenues were in the mix a year ago
- Worldwide PSG revenues may soon overtake Services (including EDS) soon
- Outsourcing is not growing strongly as in previous recession
- HP’s revenue decline in EMEA has been less than in Asia Pacific or the Americas once recalculated to local currency
On August 18thHP announced its Q3 financial quarter (ending in July). As usual in this piece I’ve ‘calendarised’ its numbers (added two thirds of its latest quarter’s results to one third of the last) to compare it with other vendors.
While the top line revenue growth was posted at –2%, I calculate that it would have been more like –18% if EDS’s revenues before acquisition were added to HP’s. That is – only slightly better than the –19% I calculated for calendar Q1 2009. Figure 1 shows the combined revenues of the two companies before and after merging and Figure 2 shows a comparison of growth rates.
Arguably I’m being slightly unfair to HP in that the combined revenues of combining companies never continue at the level of the two previously when separate. However the addition of EDS for only the period after acquisition is clearly an easier compare for the new HP.
Declines All Round For HP Offerings
Francesco Serafini and a small team of HP EMEA’s most senior executives set out the major customer wins, trends and activities worldwide and within the region over the last three months. They recognised the difficulty of the current economic climate and claimed a number of instances in which HP is gaining share in a falling market.
My analysis here is based on my own calculations of fitting HP’s Worldwide results into the calendar quarter which itself is based on taking two thirds of its Q2 result and adding one third from its Q1 period. This is what I’ve calculated:
- HP’s PC group (PSG) business was down 18% worldwide on Q208. It believes that the introduction of Windows 7 by Microsoft in October 2009 will have some positive effect on its business. In any case Eric Cador (SVP and GM PSG EMEA) suggested that its effect ‘cannot be worse than Vista’
- Enterprise Systems and Storage (ESS) division was down 24% in what Serafini described as a period which was much tougher than the previous one. ESS has launched a competitive replacement campaign for its largest EME customers
- Imaging and Printing Group (IPG) was down 20% – for its Q3FY10 results it reported a stronger decline in commercial business (-42%) than consumer (-16%)
- Softwarebusiness was down just 0.6% on the previous year – a significant improvement on the –13% it experienced in Q109
- Services business was up 85% – but as we have already noted this includes the addition of EDS’s revenues only for the period after acquisition
A picture of HP’s revenues by division (annualised to the end of each calendar Q2) is shown in Figure 3. It is interesting that its PSG division is now threatening to overtake its Services revenues. In my calendarised calculation HP’s profits were down 18% to $1,666 million.
We’ve noted before that the larger the supplier the more likely its fortunes will follow the overall market trends (unfortunately for HP, in this case dramatically downwards). As its offerings account for the largest market share in many areas, it is more exposed to market demand than smaller suppliers, who may be able to increase their performance through innovation.
Interestingly for me, EMEA was the region with the steepest decline in HP’s announced results (-11% in my recalculation) and yet was the most positive when readjusted to an estimate of local growth rates (see Figure 4).
Asia Pacific business was worst of the regions in Q209 and yet is showing a strong upward trend between Q1 and Q2. Like other vendors it’s possible that HP could suffer a ‘double dip’ in EMEA in the next calendar quarter.
The Integration Of EDS Continues Apace – But Outsourcing Isn’t Shining As In Previous Downturns
In his discussion of EDS in EMEA Bill Thomas (Senior Vice President and General Manager EDS EMEA) concentrated on the progress of integration into HP including taxation and legal requirements. It is in the middle of a three-phase activity. In particular:
- On June 1st it integrated Scandinavian countries and the Czech Republic accounting for around 1,000 employees
- In August it is integrating the UK (EDS’s biggest market), Italy, and the Netherlands among others, accounting for 23,000 employees
- By November 1st it s planning to complete the integration of the remaining 20 countries (including Germany and France), accounting for 11,000 employees.
EDS’s staff is also being trained in HP processes and systems. It has also been joined by around 6,000 from HP’s outsourcing activities in the region.
In discussion about Outsourcing HP pointed out that its stronger presence in the UK counted against it, as the downturn is stronger there. It claims to be gaining market share on a ‘year to date’ basis. However in what he described as ‘the worst economic year I’ve ever experienced’ Bill admitted that IT Outsourcing had been under severe pricing pressure and that in Business Process Outsourcing and other areas customers had been deferring all discretionary expenditure. He also indicated that the sales pipeline was currently strong.
Some Conclusions – HP Is Concentrating On Execution And Positioning Itself For The Turnaround
HP prides itself on having developed excellent processes for executing its strategy in EMEA. It is seeking to provide simplification projects for those customers able to spend and keeping relationships strong in those that are not. It continues to run its Top 100 customer programme (began in August 2008) with the intention of prioritising the largest TSG and EDS customers.
I think its results are reasonable given the current economic climate. However I would like to see more concentration on Cloud Computing (and less on Outsourcing) in coming months. Let me know what you think HP’s priorities should be and whether it can outrun the recession in coming quarters.