As a contrast to some of the copy and paste analysis that has been distributed by some analysts which was then copy and pasted by journalists, here’s a much richer engagement. And I mean richer as in revealing. Here’s some dialogue for HP’s 3Q 2015 Earnings Call with some additional commentary from the Pricing Factory® in italics.
Cathie Lesjak: “Technology Services declined 9% year-over-year, or 3% in constant currency, although support orders were up year-over-year in constant currency again this quarter and profitability remained good. We are seeing continued adoption of our new portfolio, including Datacenter Care and Proactive Care, and expect TS to continue to stabilize with improving hardware sales.â€
The Pricing Factory®: Technology Services Y-o-Y revenue growth doesn’t show any evidence of stabilization. It continues to be not only negative in real currency but negative at an increasing rate (blue in chart to the left). 11 successive quarters of negative growth in real currency is starting to add up to multiple years of negative growth. In fact HP Technology Service hasn’t yet posted a single quarter of positive year-over year $ growth in its existence as a reporting entity in the Enterprise Group which is pretty remarkable. Not even the odd potentially redeeming 1% Y-o-Y growth that HP Storage manages to throw in periodically. So TS isn’t showing any tangible sign of “stabilizing”.
Nor does the $ dollar attach rate to either HP ESSN (Servers + Storage + Networking) (red line in chart to the left)) or more crudely to just ISS/X86 Servers show any “stabilization”. It just continues to decline.
So given the available data, here’s a couple of very worthy and justifiable questions from an analyst during the call:
Aaron Rakers: Just curious as we think about the separate entities how the company thinks about the Technology Services piece, particularly as it relates to the fact that you’ve talked about positive growth on the order side. We’ve seen some positive trends on the hardware side. However, the reported growth on a year-over-year basis continues to decelerate. So when do you expect that actually to start to turn positive, and how are we thinking about the margin profile of that piece of the portfolio?
Meg Whitman: “So let me tell you, so Technology Services is the crown jewel of Enterprise Group. This is one great business,
- but there is a lag to this
– There is a lag  in “as sold” and “as reported” only if hardware is growing. And as you contradict yourself later, hardware hasn’t always been growing.
- and part of what you’re seeing in as-reported revenues is a currency issue
 - It’s not a currency issue, or at least you can’t use currency as an excuse. This problem has occurred for the past 11 quarters. Currency has not been an issue for each of the past 11 quarters. And even if it had, some action should have been taken by now to mitigate that by now.
- But frankly, as you saw our Enterprise Group revenues decline in 2012, 2013 and 2014, that has a knock-on effect with Technology Services attach:
– But Technology Services has declined by a greater % than the Enterprise Group as can be seen from the declining % attach rate. As $ hardware sales go down the reported $ attach rate % should in fact increase due high levels of revenue deferred from earlier years, not decrease.
- The other problem is there was very high Technology Services attach to our Business Critical Systems, Itanium for one. So we are recovering from that.
– The real decline in TS $ attach in the BCS isn’t due to the decline in BCS/Itanium. The attach rate on Itanium isn’t that dissimilar to X86 because a low volume Intel-built chip has a much lower failure rate than a low volume chip from a low volume manufacturer. And real decline occurred during the the PA-RISC to Itanium transition that more than a decade ago so HP has had plenty of time to mitigate this one.
- What I have to say is the team … has done a remarkable job in creating new products like Proactive Care, Datacenter Care, that are actually filling the vacuum that was left by Itanium and a downward decline in Enterprise Group hardware revenues.
– Well, year-over-year negative $ growth over multiple quarters and multiple years suggest that  the vacuum has only been partially filled which is hardly remarkable.
- So you’re now pretty soon, just like in Storage, you’re going to see a shift now to actually as-reported growth in Technology Services because the new products are kicking in, the attach rate is at very good levels and now we have hardware growing again.
– Well as we’ve seen in the previous blog, hopefully not like Storage which isn’t growing at all. BTW, the attach rate is at it’s worst level which hardly qualifies as “very good”.
- So we feel pretty good about the underlying financial architecture associated with Enterprise Group. And Technology Services has not only great financial characteristics, virtually every customer needs to attach Technology Services so they have that ability to service their hardware in their data center real time with the biggest footprint of services individuals around the world.â€
– Not true. Every customer may need technology services but that doesn’t mean that they need to buy them from HP’s Technology Services. In fact with HP’s use of the channel (unlike Dell) it leaves them very exposed to the channel substituting their own services and also end-users “rolling their own” (self-maintainers).
So either way, the facts are that the $ attach rate to both HP ISS and HP ESSN (Servers + Storage + Networking) continues to decline and is now at the lowest point ever.
So here’s an example of a couple of great questions by an analyst – Aaron Rakers – the first of which on decelerating growth wasn’t answered correctly on the basis of HP’s own data, and the second on margin profile, wasn’t addressed at all. So his questions remain unanswered. Can someone point out why anyone should be feeling “pretty good†about Technology Services the way Meg is? Or even that the business has stabilized the way Cathie thinks it has?
