HP reports big fall as services revenue dips – is cloud starting to take its toll?

HP has reported a five per cent dip in revenues in its first quarter of fiscal 2015 – led by a worrying double-digit fall in sales in its services division.

Total revenues weighed in at $26.84bn, a decline of five per cent in dollars, or two per cent on a constant currency basis, but the company’s services business saw revenues fall by 11 per cent to $4.99bn.

HP saw revenues fall across the board, with only one major division avoiding the pinch.

It’s Printing and Personal System Group, which accounts for more than half of HP by revenue and incorporates its most profitable line – printers – was also squeezed by two per cent. Only the Enterprise Group, which sells servers, storage systems and other high-end hardware escaped the revenue squeeze, with sales that were flat at $6.98bn.

Services account for 18 per cent of the company’s revenues, but just five per cent – $148m – of its $2.4bn operating profit. “This follows an almost seven per cent decline in full-year 2014, with the same reasons being cited: key account run off and weakness in EMEA. The two component parts of Enterprise Services (Application and Business Services, and IT outsourcing) each saw deep declines,” said TechMarketView analyst Kate Hannaghan.

Hannaghan believes that while HP is managing to win a fair number of the major outsourcing and services deals going, it is losing out to IBM.

“Whitman’s turnaround programme is helping profits edge forward. However, the colossal challenge HP faces in growing the Enterprise Services top line is apparent. Furthermore, progress made selling SMAC [social, mobile, analytics and cloud] services just seems to get wiped out by the steep declines in its traditional business.

“In this regard it faces a similar challenge to IBM, its largest competitor in infrastructure outsourcing. However, while legacy revenue is the source of top-line shrinkage, it remains crucial to these firms, and they must continue to ink these types of deals. Credit to HP for its recent Deutsche Bank win [other recent wins include Department for Work & Pensions, and Sheffield NHS Trust, but it lost out to Computacenter on the large Post Office deal] – but our analysis would suggest IBM is currently winning a greater share of the megadeals,” said Hannaghan.

The dip in revenues at HP’s services division is especially worrying. The main concern is that organisations’ attitudes to implementing packaged applications has changed, with CIOs more willing to consider cloud platforms and services, on the one hand, while bringing development in-house, which is increasingly regarded as pivotal to organisational success.

HP’s struggles are mirrored at major packaged application software vendors, such as Oracle and SAP, who are moving towards cloud applications, on the one hand, but will take a big revenue hit if customers move in large numbers from big implementations to subscriptions to cloud services, which can be cancelled.

HP CEO Meg Whitman, though, claimed that the company’s turnaround “remains on track”. She said: “We grew operating profit margins across all of our major business segments, increased investment in innovation, and executed well across key areas of our portfolio and in our separation activities.”

HP is currently in the process of splitting in two, with the PC and printer business being spun-off, and the rest of the business focused on enterprise. Shareholders will receive shares in both parts of the company.

However, HP remains squeezed in all its main markets, and the long-term trend is declining revenues – down by 10 per cent between 2012 and 2015. Even in printing, which remains highly profitable, the outlook has become more difficult as much cheaper generic alternatives and re-fills gain ground against expensive “official” ink and laser cartridges.

Unit sales of printer hardware fell by four per cent, while printer supplies were down by five per cent. In response to the increasingly challenging environment in printing, HP has launched subscription schemes to convert consumers to monthly payments in exchange for a regular stream of official, discounted refills, but these have not caught on.

Source – Computing.co.uk-HP reports big fall as services revenue dips – is cloud starting to take its toll? By Graeme Burton

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