Hewlett Packard CEO Leo Apotheker has two big challenges: Software and services. No one expected the services part of the equation to be so tricky.
HP's fiscal first quarter left a lot to be desired. The consumer business is weak---a known problem that was compounded by manufacturing problems in China---but services was a big issue. The services issue occupied a good chunk of HP's earnings conference call. After all, HP provided its last guidance about 70 days ago and the company's guidance wound up off by $2 billion.
Apotheker said that HP signed some big renewals, or so-called mega deals, but the quarter was hurt by a decision not to sell certain third party hardware and the inability to land so-called "add-on" work. Apotheker explained:
Services did have a mixed overall performance this quarter. It had solid long-term signings. It obviously had good margin expansion and we drove product pull-through in the double digits. The long-term signings have been primarily in the ITO (IT outsourcing) space. In Q1, as an example, we signed a record number of mega deals, those are deals that are greater than $100 million in total contract and more than half of them were new, so we're making progress there. These solid long-term signings are helping us to build what I would consider a foundation of solid annuity-based revenue. But the softness came in our short-term signings in the space of both ITO as well as application services because there are short-term deals we call it add-on work. Also in services, I think you need to take a look at technology services. We made a decision about a year ago to stop selling some low margin third party hardware and that is generating good business. It's a good business decision for us but it's generating a headwind.
What's happening here? My hunch is that all the cuts at the former EDS took its toll during the Mark Hurd tenure. Meanwhile, the focus for HP services moved away from business process outsourcing to IT services that could largely be automated. Add it up and HP needs to move upstream in a hurry when it comes to services. At the high end, HP faces the likes of IBM. At the lower end, HP faces Indian outsourcing companies. "We need to do a much better job in our higher value-added services," said Apotheker.
In other words, HP could find itself caught in the middle of the likes of IBM and Accenture and Indian companies like Cognizant, Wipro and Infosys.
We are redoubling our senior management focus on this business and we have added new leadership to the team. We will continue to invest in our capabilities to serve and deliver long-term and short-term deals. We will continue to improve our internal processes so we can drive our services delivery transformation. We continue to emphasize new types of higher value services like some of the cloud services that we recently launched.