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Hardware Propels HP But Software and Services Lag

By TC Doyle
February 21, 2014 - News

HP reported lower sales but improved earnings on Thursday for the fiscal first-quarter. In contrast to other technology giants, hardware was a big driver of growth while software and services lagged.

For the period ended Jan. 31, sales dipped 1 percent, to $28.2 billion, while income rose 16 percent, to $1.4 billion. Both results were slightly better than what analysts expected.

An even bigger surprise to company watchers were HP’s hardware sales. Sales of personal systems, which include commercial desktops, notebooks and the like, rose 4 percent, while revenue from industry standard servers jumped 6 percent. Similarly, sales of printing units rose 5 percent.

Unlike IBM and others, which have reduced their dependency on hardware sales in favor of more profitable software and services sales, HP has put more emphasis on physical products in the last two years. Proclaiming that HP is in a stronger position today than “in quite some time," CEO Meg Whitman told The Wall Street Journal that hardware is "the heritage" of the company and that it will “double down on that business."

While the bet is paying off now, it leaves the company vulnerable to rivals with lower cost structures — Lenovo, especially. Moreover, the strategy raises questions over the future of the company’s services business and its software business, which was rocked last year by the messy handling of its $11 billion acquisition of Autonomy.

For the quarter, enterprise services revenue fell 7 percent while application and business services shrank 4 percent. More troubling were the results from the company’s infrastructure technology outsourcing division. It saw sales tumble 9 percent.

Software sales, meanwhile, dipped 4 percent.

Despite ongoing challenges, Wall Street seems pleased by HP’s turnaround. Shares of the company’s stock, for example, have topped $30 each in recent trading — a 52-week high. A year ago at this time, HP shares traded for around $18 each.

“Innovation is igniting our comeback, and at a time when many of our competitors are confronting new challenges, two years of turnaround work is setting us up for an exciting future," said Whitman in a prepared statement.

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