Just for a moment, forget about revenue and earnings per share. The most interesting number out of Hewlett-Packard’s earnings announcement this week was this:
That’s the profit margin CEO Mark Hurd and his team squeezed out of HP’s (hpq) services business on the way to an impressive first fiscal quarter. The significance of the number? When Hurd bought lumbering services giant EDS for $13.9 billion a year and a half ago, he embarked on the corporate equivalent of that weight-loss show, "The Biggest Loser." For HP to win, the former EDS has to drop weight. And the surest sign of weight loss is healthy margins.<!-- more -->
That 15.8% means those margins are up 3 points from a year before. Not bad. Of course, not all the news is rosy; services revenues were actually down 1% year-over-year, and margins dipped a bit from the previous quarter. Numbers like that don’t typically stand out in a quarter where HP’s overall sales were $31.2 billion, up 8%, and cash flow from operations was $2.4 billion. And HP has a long way to go before its services business gets to the same league as, say, IBM (ibm). But still, I’ll argue that the most important takeaway from the period is this: even when it has a rocky quarter, HP is disciplined enough to keep its services biz on a healthy weight-loss regimen.
If you're one of those folks thinking, who cares about services? Dig into HP’s overall numbers a bit, and it becomes clear why that’s so important. PCs and printers get a lot of attention because they are HP’s legacy businesses – together they delivered half of the company’s revenue. But these days, services – things like data center management and software development outsourcing – are already shaping up to be the biggest single contributor to HP’s financial results.
Take a look: Though the PC group generated more revenue last quarter ($10.6 billion versus $8.7 billion for services), the services business generated three times more operating profit. In fact, services operating profit ($1.4 billion) even outpaced that of HP’s notoriously profitable printing group ($1.1 billion).
Here’s where those margins come in. Even though the services group brought in 1% less revenue last quarter than a year before, its operating profit was up about $300 million – that’s 27%.
If Hurd can get services revenues humming again after a weak quarter – and on the analyst call he said services and software are showing signs of renewed vigor – the profit payoff should be very nice indeed. We’ll see how he does at next quarter’s weigh-in.