HP business breakdown and why a PC spin-off could backfire

I had a look at HP’s latest financials, following last night’s triple blast of news from the computer giant. It is ceasing webOS operations, acquiring enterprise knowledge management company Autonomy, and considering (though only considering) a spin-off or other major change to its PC division, the Personal Systems Group. Here is what HP said:

As part of the transformation, HP announced that its board of directors has authorized the exploration of strategic alternatives for the company’s Personal Systems Group. HP will consider a broad range of options that may include, among others, a full or partial separation of PSG from HP through a spin-off or other transaction. (See accompanying press release.)

Looking at the results for the second quarter 2011, here is how the main pieces break down:

$millions

Segment Percentage of revenue Earnings Percentage of total earnings
Services 9,089 28.5% 1225 33.8%
Servers, storage and networking 5396 16.9% 699 19.3%
HP Software 780 2.4% 151 4.2%
Personal systems group 9,592 30.1% 567 15.7%
Imaging and printing 6,087 19.1% 892 24.6%
Financial Services 932 2.9% 88 2.4%

Note that “Earnings” is earnings from operations; HP actually made less money than that, because various other corporate costs have to be deducted. But it gives an idea of where HP’s profit comes from.

So what do these groups do? PSG is notebooks, desktops, workstations and other, where “other” I’d guess will include the webOS mobile devices. In PSG, notebooks accounts for 54% of the total, with desktops taking 38% of the rest. Virtually all of these run Windows.

In servers, storage and networking, 61% is from what HP calls “Industry standard servers”. This is code for Windows server.

Under services, the three big businesses are Infrastructure Technology Outsourcing (42%), Technology Services (30%) and Application Services (19%). The first of these is clear-cut (have HP run your infrastructure), but the second two are both consulting services and on a brief look seem to have some overlap.

Autonomy, by the way, reported revenue of $million 247 in the three months ending June 30 2011 – pretty tiny relative to HP.

A few comments then. It’s worth noting that PSG is the biggest single segment for revenue, but not so for profit, though it is still making a useful contribution.

Imaging and Printing contributes most earnings as a proportion of revenue. I do not know how much of that comes from absurdly overpriced ink cartridges!

If you take PSG together with Industry Standard Servers, you find that around 40% of HP’s revenue comes from boxes running Windows. If you then consider what its printers, network and storage systems attach to, and that a proportion of HP’s consulting business concerns Windows systems and applications, it is obvious that HP’s fortunes are deeply entwined with Microsoft.

If HP removes PSG that will still be true, though less so. But why would HP want do remove PSG? I would guess two main reasons. One is that it is unprofitable relative to the other segments, and the other is that HP foresees the business declining under the force of various well-documented pressures: Apple, mobile, cloud.

It still makes little sense to me. I can understand why HP might want to get out of consumer desktops and laptops, but it seems to me that to supply corporate PCs fits snugly with the rest of HP’s business and has beneficial side-effects. After all, PCs, printers and servers do all plug together both physically and conceptually. Getting rid of PSG might have a negative effect on other parts of HPs business.

In the SMB market, by the way, resellers like HP because unlike Dell it does not mainly sell direct. HP boxes generally work as advertised in my experience, though I rate the laptops less highly than the servers and desktops.

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1 comment to HP business breakdown and why a PC spin-off could backfire

  • Nico

    Idle speculation: maybe it’s a bluff to get discounts from its providers. It’s been said that PC market has thin margins.