Thursday, February 19, 2009

HP - Looking for the Balance

Most readers will be aware of the results announced yesterday during the HP earnings call. Without going into the numbers that are well represented in the public domain, there are a few notes and comments to add to complete the picture. CEO Mark Hurd heaped praise on the services business area, which to their credit performed well relative to the other business areas and to the market in general. He even singled out services as the "other" attractive annuity business with healthy and steady margins.  
Missing the chance for a balanced statement, the original annuity business (IPG) was not even praised faintly, but rather criticized for inadequate execution, especially inventory management. Hardware revenues were hit especially hard, but supplies compensated to a large extent, which is what is supposed to happen. Altogether, IPG operating profits of 18.5% exceeded those of every other business group. 

That said, the supplies trend was similar to the rest of the imaging industry, namely disappointing. With hardware sales hurting with double-digit declines, the hoped/expected steadiness of the consumables revenue was soft and turned negative, albeit at a more modest single-digit rate. Despite price increases which raise unit ASPs and encourage forward buying in some contract models, IPG supplies revenue was still down 7%. The overall swing in supplies revenue (more than -15% Q/Q) is concerning and the exact causes still need to be clarified.

While Hurd has his point regarding execution and the necessity to improve the supply chain, it is also true that the IPG business model is still robust, especially at higher volumes. Without earning an explicit mention, one interesting datapoint we spotted was the impressive 25% increase in Indigo page volume. This growth is lower than other years but still an indication of the returns that can be achieved in other underserved segments. Which could beg the question what the company could do to take better advantage of those mid- and higher-volume opportunities. A statement or strategy in that direction would have been helpful.

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