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HP Earnings: Rocky Picture for the Enterprise IT Industry

Hewlett-Packard (HPQ) announced its results for its first quarter (ended January) of its fiscal year 2011. Revenues were slightly below Wall Street expectations, although earnings were above. But look at some of the patterns in the revenue break-out by business segment, and HP as a bellwether of business IT purchasing shows some disturbing trends.

For example, if business had returned to a post-recessionary "normal" level and IT spending was improving, you'd expect all categories of related products and services to benefit. That's not happening. Services are slowly declining in revenue and HP's operating profit is dropping, which suggests either some problematic business inefficiencies or continued pressure on prices. That could also help explain the drop in revenue. Here's an HP chart illustrating the change (click to enlarge):


The enterprise services, storage, and networks segment had been growing over time. But the last quarter showed the first quarterly downturn in two years at a time when things are supposed to be getting better. Some may have to do with competition from Dell (DELL) and HP's fractured business relationship with Oracle (ORCL), historically an important partner (click to enlarge):


In this case, the year-over-year growth figures, which HP emphasizes, mislead because they ignore the drop. At a time when things are supposed to be getting better, that's a significant shift in the wrong direction. Right now, 61 percent of the division's revenue comes from HP's industry-standard servers, which is another way of saying commodity X86-based machines. IT continues to move away from the proprietary hardware and software that can beef revenue and margins

Seeing a trend is hard for the imaging and printing segment in HP's graph. For one thing, it combines both consumer and business machines. So ignore the graph and look at the numbers, which separately break out the two categories. According to HP's figures, commercial hardware was up 13.4 percent year over year... and down 5.3 percent since the previous quarter. Again, not a good sign for the IT industry as a whole, which is supposed to be getting back to a normal level of spending. Could it be that the new normal is lower than it has been?
The relative good news was in the personal systems group (click to enlarge):


Both revenue and operating profits are trending up. But given Apple's rapidly rising mobile-PC sales with the success of its iPad, this is one area that is in great danger, if increased tablet sales over time will have an impact on notebooks, laptops, and desktops. That's why HP's webOS strategy is critical. But if it can't make headway, the company could be in long term trouble.

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Image: morgueFile user hoodsie, site standard license.