It was back in August 2009 I first used the term ‘miracle margins’ to question the seemingly outstanding profitability of HP’s EDS-enhanced services business (see HP Services miracle margins). I returned to this theme several times in subsequent quarters but could never square the circle how HP’s services margins could be comparable to IBM’s with a lower mix of activities higher up the value chain.
Well, the proverbial chickens are finally coming home to roost, with new CEO Leo Apotheker’s tacit admission that services margins will indeed come down in the – wait for this – pursuit of ‘higher-value’ services business. One of us has missed the point. This ‘higher value’ business is to be around (unspecified) cloud-related services, a key theme of Leo’s highly aspirational ‘state of the nation’ address in March (see Leo lays out his dream for HP). Leo also laid in to ousted HP CEO, Mark Hurd, blaming him for failing to act early enough on the cloud computing trend. Odd he didn’t mention that when he took up the reins.
But what really rattled the market was HP’s hastily brought-forward Q2 results announcement which carried the news of a 23% dive in consumer PC revenues (see HP warns...). Clearly the tablet revolution was another trend Mr Hurd must have ‘missed’. And despite Leo’s comment that “HP executed well and delivered a solid quarter”, he trimmed FY revenue guidance by about 1% and earnings guidance by about 4%.
For the record, HP Services Q2 revenues (to 30th April) rose by 2% yoy to $9.0b. Operating margins slipped back for the second consecutive quarter to 15.2%. I am meeting HP EMEA head for Enterprise Services, Mike Nefkens, next week and I don’t doubt we will have a most interesting discussion.