HP Earnings: R&D Edges Up While Product, Not Services, Drive Sales

HP's (HPQ) earnings report reveals some interesting trends for the company and the tech industry. Taken together, they're another indication that tech is, indeed, coming back to life, and that HP is riding a wider spending shift toward products and away from services.

Start with an important long-term issue for HP: R&D spending. For an extended period of time, HP was cutting both absolute dollars in the critical area as well as the percentage of revenue it devoted to new product development. That seems to have leveled off, if you look at these two graphs I've put together from company earnings announcements:

Comparing quarters since the beginning of the company's fiscal year 2007, R&D spending seems to have leveled off, particularly as a percentage of net revenue. It seems that HP has put the brakes on cutting R&D, finally settling on a level of investment that makes sense to management.

As you can see in the following graph that again I put together from public numbers, quarterly revenue also seems stable:

The company's numbers are up strongly year-over-year, but more important is that the overall revenue picture stabilized over a few quarters. Not only that, but it now rests as a higher level than it did right before the economic crash, showing that business has come back in a big way to HP.

Also interesting is this breakout of revenue by operating division:

Over the last few months I've noticed that some big computer companies saw far stronger revenue growth in hardware and software lines rather than in the service groups that HP, IBM (IBM), and Dell (DELL) have built over time. HP showed this trend in February, while IBM demonstrated it in April. The same is true again for HP. Services were flat and growth came largely from products. I suspect the reason is that many IT departments are spending more on hardware replacements that have been on hold for a while.

Year-over-year comparisons of earnings from operations were less straightforward. Although services revenue was largely flat, earnings picked up 19.5 percent, suggesting that HP made an intelligent trade between growth and profitability. Enterprise storage and servers saw earnings of 12.6 percent from operations in 2010, versus 8.9 percent in 2009. Software became more profitable, but the personal systems group became less so. And results for the imaging and printing group suggest why HP is so concerned about keeping printer ink prices high.

Image courtesy of HP