EDS Is a Bright Spot for HP

Services was the lone shining light in an otherwise difficult fiscal second quarter for Hewlett-Packard, thanks in large part to its $13.9 billion acquisition of EDS in 2008.

In announcing second-quarter earnings May 19, HP officials said the $8.5 billion in revenue that the company's services business pulled in almost doubled from the same period the previous year.

At the same time, President and CEO Mark Hurd said HP's scale and work force contributed to the growth of EDS—and its overall services business.

"We are seeing more deals than EDS saw before [the acquisition] because of our position in the marketplace [and] because of our sales force," Hurd said in a conference call with analysts and reporters.

EDS will contribute even more down the road beyond increasing revenue. After the acquisition, HP officials predicted that annual savings from the EDS deal would be about $2.5 billion per year. However, Hurd said based on real estate in connection with the EDS deal, another $500 million per year in savings were found, putting the overall savings from EDS at $3 billion per year starting in 2012.

HP's other businesses did not fare as well in the fiscal second quarter, with everything from PCs to storage to printing seeing revenue decreases of between 6 and 23 percent. Companywide, revenue came in at $27.4 billion, down about 3 percent over the same period the previous year. The only areas with any positive steps were in China and among U.S. consumers, Hurd said.

Hurd and Cathie Lesjak, executive vice president and chief financial officer, both said HP executed well, not only on the business side but in driving expenses down. However, Hurd said more needs to be done, adding that HP would cut another 2 percent of its work force over the next 12 months.

Looking forward, Hurd said HP expects revenue to be flat or down 2 percent for the fiscal third quarter, and 4 to 5 percent for the year.

Enterprises are still keeping a tight hold on their money, keeping systems around longer than normal, Hurd said. He doesn't expect that to change until at least 2010.

"I have customers telling me, 'We're just delaying as long as we can until we have to buy,'" Hurd said. "I think CIOs have given marching orders [to] just keep that infrastructure running."

Analysts agreed.

"HP's results demonstrate continued reluctance of businesses to invest in IT, as the commercial hardware segments' revenue declined the most during the quarter," Josh Farina, an analyst with Technology Business Research, said in a research note.

Still, Hurd said he likes HP's position once the economy improves, given its scales, breadth of offerings and work in reducing expenses. He and Lesjak talked about the company's ability to not only sell products, but to offer integrated solutions that meet the growing demand of the evolving data centers, such as the BladeSystem Matrix, an all-in-one offering that includes computing, storage, networking and management software.

"We like our chances when the rebound occurs … because of what we're doing now," Hurd said.