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While we’re on the subject of excuses for HP …… what about Technology Services?

September 17, 2015 by ·


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?

Filed Under: Marketing, Technology Services ·

You should wonder why analysts feel the need to make excuses for HP Storage Part 2: here’s the data you asked for

September 3, 2015 by ·


Some folks asked to see the year-over-year revenue growth for storage and here it is. It’s all sourced from the companies’ 10-Q submissions and compares product revenue (not software or services). You can see HP Storage (thick brown line) along the bottom with IBM Storage (thin black line) with mostly negative growth since 2011. The crossover in the last quarter’s results are highlighted in a red ellipse. Lipstick red. Does this really qualify as a turning the corner?

Filed Under: Currency, Marketing ·

You should wonder why analysts feel the need to make excuses for HP Storage.

August 26, 2015 by ·


The Register: HP storage results borked by bleeding currency rates It’s up to HP to mitigate the impact of the currency; if the currency impact was favorable it wouldn’t get a mention.

  • In the past 16 quarters, HP Storage has only shown positive year-over-year growth in four of them, and of those four, three showed growth of 1.0% or less. Was currency also to blame in all of the past 16 quarters? I don’t think so. But forget currency, just think of 15 out of 16 quarters of year-over-year-growth <+1.0% with 12 of those quarters being negative.
  • With enough negative quarters in tow – remember 4 bad quarters is only one bad year but 16 bad quarters is an election cycle – it eventually becomes possible to start to appear to “outgrow†the competition, but that’s only because HP is “growing†from the very low base it created for itself.
  • So if HP Storage “appears†to be doing comparatively better than EMC, IBM & NetApp because it outgrew each of them in the past quarter (FY3Q15), well that’s the first time that it has happened. Ever. One quarter marginally outgrowing EMC doesn’t make up for an eternity of under-growing EMC.
  • To put last quarter’s revenue of $784M in its proper context: it’s the 2nd lowest quarter of revenue in the last ten years (the lowest was the previous quarter) and that’s 20% down from its’ 3Q peak in 2011 of $976M. In contrast, EMC is up 6% over the same period, not great, but significantly better than HP.

And ask yourself this: what exactly is it that HP Storage will be able to do after the split that it couldn’t do today?

[Pause}

p.s. I really wasn’t going to post this until a friend asked at lunch how HP Storage was doing because she’d heard that they were doing rather well, at which point ….

Filed Under: Currency, Marketing ·

Paul’s Pricing Dictionary: Re-structure

August 25, 2015 by ·


Re-structure, n. & vb. The Bid Desk’s rejigging of a deal to maintain margins and lower risk while giving the illusion of lower prices.

Filed Under: Marketing, Paul's Pricing Dictionary, Quote, Re-quote, Re-structure ·

The Accidental Price War – How Do You Try To Stop a Competitor’s Inadvertent Move From Turning Into A Fully-fledged Price War?

August 19, 2015 by ·


Don’t react with your pricing and follow them. You need to try and avoid following their price down at all costs; it’s a negative sum game; it’s the primrose path. Take a pill, lie down and re-read Chapter 11 of “The Strategy & Tactics of Pricing” 5th Edition by Nagle, Hogan & Zale. This doesn’t directly cover what to do in the event of an inadvertent price move which could lead to an unintended price war, but it will help you develop the framework within which you will need to make your decisions. Before you respond, you will need to think through how the competition will respond to your response, how you in turn will respond to that, and so on. The extra twist is how you think that they made the mistake – the inadvertent move – in the first place. Will a response just compound the problem by pushing your competitor to make more or less the same mistake again? Another reason for not responding.

Put out feelers to find out the extent of their communications to customers and channel partners; check out their website, industry press, and social media. Monitor the situation. Be extra vigilant. Increase the frequency of your competitive monitoring.

In the first case that I mentioned in my previous blog, following the competitor’s downward price move would have more likely make it difficult for them to see that they had made a mistake in the first place. Competitor premiums would have returned to their “normal” level. Monitoring competitor premiums would have been the one, and perhaps the only analysis that they were performing. You’re starting to get more insight into what metrics they do and do not monitor. Useful. Following them down and normalizing the premiums would reduce the probability of them noticing and correcting their error. And this is what you want them to do, notice that they made an error and correct it.

In the second, it was in a way gratifying to note that all our competitors had ignored our super low pricing. Remember, our list prices were lower than everyone else’s street prices (list minus average discount). All our competitors had ignored our pricing. Not some of our competitors, all of them. Not some of pricing, all of our pricing. There was no mention of our super low pricing anywhere in the press or online. It was as if our prices hadn’t existed. This was good news. They – we – somehow hadn’t trashed the margins in the industry. It left the door open for us to raise prices and remove a potentially destabilizing threat to the profitability of the market.

In the third, not raising prices in the face of a weakening local currency would have made us miss our US$ financial targets and also – because the competitor premiums would have been “normal” – there would have nothing to indicate to our competitor that might want to consider raising prices too. We had to raise prices, and keep on raising them, even if they didn’t.

So how did these situations resolve themselves?

Filed Under: Marketing, Price War ·

Paul’s Pricing Dictionary: Transfer Price

August 17, 2015 by ·


Transfer Price, n. A cost accounting construct conceived by Tax Accountants to minimize corporate tax bills and unintentionally expose those who think that this somehow the responsibility of the Pricing Team – presumably because it has the word “price” in it – thus exposing their ignorance of both Pricing and Accounting in one fail safe swoop.

Filed Under: Marketing, Paul's Pricing Dictionary, Transfer Price ·

The Accidental Price War – How Can You Tell If It’s Accidental?

August 5, 2015 by ·


Sometimes competitors make price moves which have the potential to start an price war. But how can you tell if the move was deliberate or not? This is critical because you will need to respond to those situations very differently. Well, you can’t immediately tell for sure in all cases, but there are some tell-tale signs. In one case I came across a competitor which had reduced prices across the board in a large market in a region where it had its largest market-share and more importantly its highest relative market-share (their market-share/our market-share). I investigated this very discreetly with a few key regional team members and to see if our competitor had been communicating anything to customers or the channel, and they had not. If this was intentional there would have been some sort of communication out there otherwise they would not have been able to fully leverage the price move. As we pondered on our competitor’s motivations (as we always did), we couldn’t find a single reason why anyone with a pulse would intentionally attack on price where they had their largest relative market-share, and concluded that they had done this unintentionally.

In a second case, I started working with a small division in a company and I realized that its products were massively under-priced compared to the competition. It’s list prices were lower than the competitors’ average discounted prices (street price). Not just one competitor, all of them. Think about that: list prices lower than competitors’ street. That effectively it had created the potential for a price war without even realizing. And because it didn’t realize this – it was still growing more quickly than all the other divisions in the company which had helped it evade internal scrutiny – it hadn’t fully taken advantage of its aggressive price position.

In a third case, one of our major competitors didn’t raise prices as that country’s currency declined in value rapidly against the US$ during the 2008 financial crisis. As we – and our other competitors in this US$ denominated industry – raised our prices across the board three times, this one competitor did nothing. We observed this for about nine months and they still didn’t move. Nor did they try to take advantage of their aggressive price position; there were no communications to customers or the channel. They didn’t have an uptick in sales or market-share. They were asleep at the wheel.

So how do you try to stop a competitor’s inadvertent move from turning into a fully-fledged price war? More to follow.

Filed Under: Marketing, Price War ·

Paul’s Pricing Dictionary: Scholarship

August 3, 2015 by ·


Scholarship, n. A fancy term used by academics for a discount.

Filed Under: Discount, Marketing, Paul's Pricing Dictionary ·

Paul’s Pricing Dictionary: Strategic Deal

July 31, 2015 by ·


Strategic Deal, n. deal struck at a massively negative gross margin struck by CEO or Executive Sponsor usually without hope of margin recovery.

Filed Under: Margin Recovery, Marketing, Paul's Pricing Dictionary ·

Who Started the Price War? 88% of companies said it was someone else …

July 30, 2015 by ·


 88% of companies said it was someone else who started it.

Only 5% reported that they started it on purpose.

And 7% said that they started it accidentally.

It seems highly probable that many of the 88% actually started the price war without realizing it …. or maybe are in denial.

Have you ever started a price war by mistake?

Presented at the Professional Pricing Society Conference in May 2015 by Prof. Dr. Dr. h.c. mult. Hermann Simon (Source: Simon-Kucher & Partners Global Pricing Study 2014)

Filed Under: Marketing, Price War ·
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