There was really only one mission that new HP ‘captain’ Meg Whitman had to achieve in last night’s earnings call – and that was to steady the ship. After taking on extra ballast (in the form of Autonomy), then keel-hauling the previous captain (you know who), and making the PC business walk the plank to its very edge, there was much steadying to do.
Actually, I thought she did a pretty reasonable job, with a stirring speech laying out HP’s priorities for 2012 and beyond. These included more investment in HP’s troubled services business – and no more mega-acquisitions (assuming you interpret a $1b deal cap as not ‘mega’). Whitman also decided to throw out the crystal ball on revenue forecasts and henceforth HP will only guide to EPS. Frankly this is what IBM has always done and makes perfect sense, especially in these rather uncertain times.
There’s lots of ‘stuff’ in the numbers, and we’ll probably delve deeper in UKHotViews Extra at a later date. But for now I just want to look briefly at HP’s services challenge – which is mostly about profitability. HP continued to see services operating margins decline in Q4 (to 31st October) – they stood at just 12.8% compared to 16.4% this time last year. I had previously alluded to HP’s ‘miracle margins’ (see No more ‘miracle margins’ at HP Services) and so it has come to pass. This decline brought HP Services’ FY operating margins down from 15.9% in FY10 to 14.3%.
And what is Whitman doing about it? Well, for one thing, investing in new service management tools to replace existing manual processes. Fair enough – but that’s basic ‘health and safety’ stuff that should have been done ages ago. It’s really all about “shift(ing) the business mix towards higher-growth, higher-margin services … such as applications”. Noble cause, indeed, but doesn’t happen by edict. Part of the problem is that HP still has a huge rump of low-margin, legacy ex-EDS IT outsourcing contracts which have little hope of margin enhancement as there’s no more ‘discretionary’ spend – traditionally the IT outsourcing ‘icing on the cake’. And HP doesn’t have a ‘real’ business consulting arm where higher margin work is usually to be found. Neither are trivial problems to resolve.
So, Whitman is showing that she can talk the talk. Now she must prove she can walk the walk.