HP’s Q3 performance makes for uncomfortable reading in many areas, with group revenue down 7% to $27.2bn. EMEA was down 8% to $9.6bn and Europe specifically was described as being “challenging”. Non-GAAP operating profit was $2.3bn (8.4% margin), down $441m on last year. Notably, HP has now changed its guidance and says it is not likely to grow this year.
HP also announced that COO, Bill Veghte, will replace Dave Donatelli as head of the Enterprise Group. Donatelli is to be moved to a rather dubious-sounding “special assignment”.
Each of HP’s divisions saw Q3 revenue decline over the comparable period last year, with the exception of software, which grew just 1%. Furthermore, those declines were material. For example, the Personal Systems business – down 11%, Enterprise Group – down 9% and Enterprise Services – down 9%. However, it’s not just the top line that HP needs to worry about. Operating margin was also down across the board, again with the exception of software.
In the services business, revenue has hovered below $6bn in each of the first three quarters of the year, which is lower than the six quarters previous to the start of FY14. It continues to see “improvements” in contract signings, but these are mostly renewals rather than new business. On a quarter-by-quarter basis, services has actually seen some improvement to margin during the year, with a 3.3% margin in Q3 versus 2.6% in Q2. This growth is on the back of a restructuring programme and operational improvements. While these are important, HP really needs to be generating more high quality revenues to help it transform the margin profile of the business more fundementally. It needs to be delivering a greater proportion of applications, consulting, and BPO services where the margin and market growth rates are higher than IT outsourcing. So for example, in the UK it needs to be doing more deals like the one inked with Deluxe Digital Cinema and announced in May.
TechMarketView subscribers can read our latest view on HP’s UK services business here: HP Enterprise Services: a mountain to climb.