EDS, Services Stabilize HP's Q1

Hewlett-Packard has shown its resilience during the ongoing recession—until now.

The bad news is that demand for PCs is down and is expected to stay down in 2009. The good news is that services appear to be remaining resilient for computing and IT services giant HP, making HP's EDS acquisition in 2008 seem like an even smarter bet than some originally thought.

And for solution providers that have been on the fence about getting into the services market with a managed services or SAAS (software as a service) play, HP's experience provides one more bit of evidence about the benefits of making such a move.

HP the week of Feb. 16 reported revenue of $28.8 billion, a 1 percent increase in revenue from the year-ago quarter, but less than the $31.9 billion analysts had been expecting.

"After a strong year-end finish, HP's recent first-quarter earnings showed how the turbulent economy finally caught up with one of the most fiscally disciplined IT companies in the market," says John Madden, principal analyst at Ovum, in a report issued the week of Feb. 23.

"With year-on-year drops in all lines of business but services with EDS, HP is continuing its ongoing cost-savings plan while implementing newer efforts such as companywide salary reductions," Madden adds. "The vendor is counting on these moves, along with customers' increased appetite for cost-efficient outsourcing through EDS, to maintain its balance."

Net earnings at HP declined to $1.8 billion from $2.13 billion during the same period a year ago. Net earnings per share were 77 cents, compared with 83 cents during the same period in 2008. Net earnings during the first quarter included charges related to the EDS acquisition and restructuring. HP says non-GAAP net earnings totaled $2.28 billion, compared with $2.29 billion for the same period a year ago.

HP's PSG (Personal Systems Group) reported a revenue decline of 19 percent to $8.8 billion, with unit shipments down 4 percent. Desktop revenue fell 25 percent, notebook revenue fell 13 percent and consumer client revenue decreased 18 percent.

The IPG (Imaging and Printing Group) reported a 19 percent revenue decline to $6 billion. Supplies revenue fell 7 percent while commercial hardware and consumer hardware revenue declined 34 percent and 37 percent respectively, according to HP. Printer unit shipments decreased 33 percent.

ESS (Enterprise Storage and Servers) revenue fell 18 percent to $3.9 billion. Storage revenue dropped 7 percent, with the midrange EVA product line down 7 percent. Industry Standard Server revenue and Business Critical Systems revenue declined 22 percent and 17 percent respectively, while ESS blade revenue grew 4 percent.

Services revenue increased 116 percent to $8.7 billion, primarily due to EDS' contribution. HP says revenue in Technology Services was flat.

HP Software revenue declined 7 percent to $878 million.

"While it was clearly HP's toughest financial quarter in years, the reality is it could have been much worse," Madden says. "CEO Mark Hurd and his leadership team had been cracking the whip of fiscal discipline long before the recession forced many other companies to take up such behavior. Even prior to the EDS purchase, when HP reported record revenues, Hurd demanded greater cost justification and controls throughout the company; it just made good business sense."