netrashetty
MP Guru
Hewlett-Packard Company (NYSE: HPQ), commonly referred to as HP, is an American multinational information technology corporation headquartered in Palo Alto, California, USA. The company was founded in a one-car garage in Palo Alto by Bill Hewlett and Dave Packard, and is now one of the world's largest information technology companies, operating in nearly every country. HP specializes in developing and manufacturing computing, data storage, and networking hardware, designing software and delivering services. Major product lines include personal computing devices, enterprise servers, related storage devices, as well as a diverse range of printers and other imaging products. HP markets its products to households, small- to medium-sized businesses and enterprises directly as well as via online distribution, consumer-electronics and office-supply retailers, software partners and major technology vendors.
HP's posted net revenue in 2009 was $115 billion, with approximately $40 billion coming from services. In 2006, the intense competition between HP and IBM tipped in HP's favor, with HP posting revenue of US$91.7 billion,[5] compared to $91.4 billion for IBM; the gap between the companies widened to $21 billion in 2009. In 2007, HP's revenue was $104 billion,[6] making HP the first IT company in history to report revenues exceeding $100 billion.[7] In 2008 HP retained its global leadership position in inkjet, laser, large format and multi-function printers market, and its leadership position in the hardware industry.[8] Also HP became #2 globally in IT services as reported by IDC & Gartne
Hewlett-Packard (NYSE: HPQ) is a diversified technology company that has reached several key milestones in recent years. In 2009, HP's revenue declined by 3.2%, following a 13.5% gain in 2008.[1]
The drivers of HP's recent success have been two-pronged. The company has undergone significant cost cutting measures since 2005. At the same time, the company has focused on driving growth in key areas such as software and services. Software and services are generally much higher margin than hardware. IBM, which generates most revenues from services, realizes operating profits nearly twice as high as either HP or Dell. This transition continued with HP's acquisition of business network producer Electronic Data Systems (EDS) in August 2008. This acquisition helped improve the weighted-average net revenue growth of HP Services division from 1.1% in FY07 to 5.6% in FY08.[2]
On March 5th 2010, Hewlett Packard revised its 1Q09 earnings due to a lawsuit against EDS, a company HP acquired in August 2008. The litigation brings HP's 1Q10 net income down from $2.32 billion to $2.25 billion . A London court ordered EDS to make an interim payment of $112 million to British Sky Broadcasting. HP will appeal the decision. [3]
On July 1st, HP completed its acquisition of Palm for $1 billion, or $5.70 per share, giving HP a foothold into the smartphone market.[4]
Company Overview
Business and Financial Metrics
In the fourth quarter of 2009, HP's revenue increased 8% to $33.3 billion. This quarter was the first for CEO Leo Apotheker, who had replaced Mark Hurd, the former CEO forced out on allegations of sexual harassment and expense report inaccuracies. Printer shipments increased 14%. Its profit increased 8% to $2.5 billion.[5]
Contents
1 Company Overview
1.1 Business and Financial Metrics
2 Business Segments
2.1 Personal Systems Group (34% of 1Q10 Revenue[10])
2.2 Imaging & Printing Group (20% of 1Q10 Revenue)[10]
2.3 Enterprise Storage & Servers (14% of 1Q10 Revenue)[10]
2.4 HP Services (28% of 1Q10 Revenue)[10]
2.5 Software (3% of 1Q10 Revenue)[10]
2.6 HP Financial Services (1% of 1Q10 Revenue)[10]
2.7 Smartphones
3 Trends and Forces
3.1 Imaging and Printing
3.2 Personal Computers
3.3 Expansion of Software and Services
3.4 Growth in Enterprise
4 Competition
4.1 Hardware: PCs and Servers
4.2 IT Services
4.3 Printing and Imaging
4.4 Smartphones
5 References
In the second quarter of 2009, HP's revenue increased by 13 percent to $30.85 billion. This increase was primarily due to a rise in sales of PCs and other hardware. Notebook revenue rose by 17 % and desktop revenue rose by 27%. PC replacement demand driven by Windows 7 is expected to grow throughout the second half of 2010 and the beginning of 2011.[6] Overall, HP reported a profit of $2.2 billion, up from 28% from $1.72 billion.[7]
In 1Q09, HP sales' rose 8% to $31.2 billion from $28.8 billion. Profit also increased from $1.9 billion to $2.25 billion. Profit and sales were primarily due to a 20% jump in computer and laptop sales which accounted for $10.6 billion and an increase of 4% in the imaging and priting sales to $6.2 billion. [8]
Since 2005, HP has been growing at a Compounded annual growth rate - CAGR of 5.73%. HP has been cutting its operating costs since 2005, when operating expenses accounted for approximately 96% of total revenue. The bulk of these measures fell under the goal of streamlining the company's structure and included removing several layers of management, phasing global operations into all of HP's business segments, and outsourcing more production to subcontractors(by mid-2008, more than half of HP's PCs are built entirely by subcontractors[9]).
Business Segments
HP is the global leader in Personal Systems and Imaging and Printing. The company HP provides a wide range of products and services to its customers and is divided into six business segments:
Personal Systems Group (34% of 1Q10 Revenue[10])
Hewlett-Packard is the world's largest manufacturer of personal computers in the world in terms of unit volume and annual revenue. Its Personal Systems Group (PSG) is responsible for the development and sale of HP's commercial and consumer PCs, workstations, handheld devices, digital entertainment systems, and other related services and accessories.
In 2009, this division's revenue increased 20% from the previous year to $10.6 billion. The the average sale price (ASP) declined less on HP's line of notebooks and PCs this year than the previous year . Furthermore, the US PC market grew by more than 20% in 1Q10 and HP increased its market share in this division by 4%. The operating profit of this segment was $530 million, or 5% of the revenue.
Imaging & Printing Group (20% of 1Q10 Revenue)[10]
Hewlett-Packard is the leading provider of imaging and printing systems in the world. HP's Imaging and Printing Group (IPG) provides consumer and commercial printer hardware, printing supplies, printing media and accessories, and scanning devices.
In 1Q10, consumer printing shipments grew by 18% and commerical printing shipments grew by 11%. Sales of wireless printers doubled and ink sales tripled. Total printer unit shipments grew 16%, the largest increase in three years.
Enterprise Storage & Servers (14% of 1Q10 Revenue)[10]
HP is one of the leading providers of servers in the world, offering a wide range of servers and storage products and solutions for small businesses and larger corporations. The Enterprise Storage and Severs (ESS) segment offers industry standard servers, business critical systems, and storage products and services. The recent acquisition of EDS will make HP the second largest producer (after IBM) of data systems and data processing for businesses and large enterprises.
In 1Q10, ESS's revenue grew 11% to $4.4 billion due a 27% revenue increase in industry standard servers. Industry standard serves include entry-level and mid-range ProLiant servers. Average selling prices continued to increase.
Contribution to Revenue[10]
HP Services (28% of 1Q10 Revenue)[10]
This segment offers a large variety of information technology services, including technology services, consulting and integration services, and managed services. Technology services range from individual product support to business technology solution services for global corporations. Consulting and Integration covers the design and execution of technology solutions for customers. Managed services include outsourcing, managed web services and other services. HP Services works with HP's IPG and ESS segments in order to provide customers with full, end-to-end business solutions.
Revenues from this division was $8.7 billion, a decline of 1% from the previous year. The IT outsourcing business grew 2%; Application Services declined 8%, BPO declined 3%, and Technology Services declined 2%. This segment's operating profit 1Q10 improved $240 million to $1.4 billion. 15.8% of revenue due to the synergies from the EDS acquisition.
Software (3% of 1Q10 Revenue)[10]
HP's Software segment provides management software solutions that assist large companies in managing their operations and information technology infrastructure through HP's OpenView software brand. HP Software's other major offering is the OpenCall brand which offers a platform for utilizing voice and data services for network providers. HP recently acquired the Mercury Interactive Corporation, an IT management software and services company, in order to further expand the offerings of HP's Software segment.
In 1Q10, HP Software's revenue remained the same at $878 million compared with the prior year. However, the segment increased its operating margin by 310 basis points to 19%.
HP Financial Services (1% of 1Q10 Revenue)[10]
Hewlett-Packard offers financing, leasing, and other financial management services for its larger enterprise customers, small businesses, and educational and governmental customers in order to allow its customers to purchase complete end-to-end information technology solutions.
In 1Q10, this division grew 13% to $719 million. Its operating margin increased 290 basis points to 9.3%.
Smartphones
On April 29, 2010, HP acquired Palm for $1 billion in cash. HP paid $5.70 a share, a 23% premium, for Palm. Palm, famous for its Palm Pilot, has seen heavy competition from Apple's iPhone, RIM's Blackberry, and other smartphones running Google's Android software. Palm, whose newest phones Pre and Pixi were largely unsucessful, has seen its share price drop 53% in the past year and it has been unprofitable since 2008.[11]
Trends and Forces
Imaging and Printing
Hewlett-Packard's most profitable venture is their Imaging and Printing Group, which the company operates like a razor-and-razor-blade business model. It has been estimated that HP sells consumer printers at a loss, commercial printers at a small profit and its replacement ink cartridges at with a margin over 50%. As a whole, the Imaging and Printing accounted for 25% of total revenue for FY08, with supplies being the only sector in this group that grew between FY07 and FY08 in net revenue.[12]
The business model for this group makes the revenue stream volatile. The lowering margins in the commercial and customer hardware market have affected the total revenues generated by this group. For large scale commercial businesses, HP introduced a its high-end digital printer offering (called Indigo) and acquired Scitex Vision, a specialty company ultra-wide digital printing. HP's strength is printing and imaging is threatened by increased competition from laser printers and inkjets.
Personal Computers
The global downturn has affected the growth rates in revenues for both the notebook and desktop PC markets. A 18.9% decrease in revenues at 30th April 2008 ($8.1B) when compared to 30th April 2009 ($10.1B).[13] In spite of these current losses, HP's outlooks looks positive as analysts predict the market to increase in 2010 as the global economy improves.[14]
Expansion of Software and Services
An integral part of a company's infrastructure is the software and services that helps manage the company and the servers it runs on. To grow their offerings in this area, HP acquired EDS in August of 2008. This acquisition had a direct impact on the revenue generation for this group.
However the global recession has taken its toll on this group as well with 15.3% loss in revenue for FY09Q1 when compared in FY08's 1st quarter results.[15]
Growth in Enterprise
HP's Enterprise Servers and Storage division is the main segment through which Hewlett-Packard offers information technology infrastructure products and management to businesses. The ESS group accounted for 18% of total revenue in 2007 with a segment operating margin of 10.5%. In order to increase their leading market share in the server industry, HP has been changing their product mix within the ESS group to adjust to the industry trends.
One of the company's key leverage points is its existing relationships with enterprise customers for its printer and PC businesses. With a broadening portfolio of hardware and even services, HP can move to provide full technology offerings to its customers. On the down side, enterprise-level capital spending is highly sensitive to changes in the economy and technology is often one of the first items cut during economic declines. The US financial services sector is expected to decrease orders due to the credit crunch. At the same time, HP reported that it was largely unaffected by this in Q4 2007 because of their relatively small exposure to the financial services sector.
In May 2008, HPQ completed plans to acquire Electronic Data Systems (EDS) for $13.9 billion,[16] a 32.5% premium over EDS's share price before this potential deal was announced. This would make HPQ the number two producer of large-scale corporate data systems, allowing it to compete with number one, International Business Machines (IBM), more effectively. Additionally, HPQ and EDS have different product lines and customer bases which would allow many "cross-selling opportunities."[17] Despite this potential size advantage, there are several possible problems with this acquisition. First, HPQ paid a considerable premium for EDS, which suffered a 62% decline in profits for Q1 2008, and has had very limited profit growth over the past 5 years. Second, the market for large corporate data systems is highly competitive, resulting in low profit margins. Finally, EDS has 140,000 employees, the vast majority of which are expensive US workers, leading to high labor costs, which is a serious handicap in this cutthroat market segment where more and more work is being transferred to lower cost programmers in places such as India. The two companies will be totally integrated over a three year period, with management expecting to cut $1.8 billion a year in costs through the merger.[18]
H-P's enterprise services business is aggressively moving toward automating data centers and making other operational changes in its IT services business and expects to spend $1 billion in this regard.This move, along with the second phase of cost cutting resulting from integration with EDS, where H-P can combine data centers, IT networks and other operations, resulted in HP announcing 9000 jobs cut on Jun 01, 2010. [19]
Competition
Although HP's main competitors are Dell and IBM, each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while IBM has shifted towards a IT services provider. HP provides both of those offerings but maintains a large cash cow business with its printers, which generate half of all operating profits.
Hardware: PCs and Servers
In terms of revenue, HP is the largest producer of personal computers with Dell coming in at a close second. However the PC market is fragmented with the top ten companies accounting for only approximately 57% of global desktop sales. The notebook market is more concentrated with the top ten companies controlling over 80% of the market. In the server market--which is generally higher margin that PCs--HP is a close second to IBM, with Dell ranking third.
IT Services
IBM is a far more profitable company than either HP or Dell. This can largely be attributed to IBM's 40+% gross profit rate from its high-margin services business, which generates over 50% of its overall revenue. As a more profitable enterprise, IBM has the opportunity to reinvest in its business and take back the leading spot in the IT industry.
Printing and Imaging
While HP's two largest competitors are IBM and Dell, neither of these two companies produce printing and imaging hardware. This is one of the largest differences between HP and its competitors because such large portions of revenue (27%) and operating margin (over 40%) come from HP's Imaging and Printing segment.
The printer market can be divided into two product categories--inkjet printers and laser printers--where HP's major competitors include Lexmark, Canon, Epson, Xerox and Samsung. HP is the market leader for both types of printers.
A majority of revenue and nearly all profits in the Printing and Imaging segment come from the sale of ink cartridges, which extend the revenue streams from a printer hardware customer by 3 to 4 years. As such, one of the biggest threats to their cash cow business is the emergence of cartridge remanufacturers or refillers, especially for the inkjet market (laser cartridges are much more complicated). Various companies are getting into this game and cutting into HP's cartridge sales.
Office supply retailers such as Staples and Office Depot have started to sell their own private-label ink cartridges, which are old HP cartridges filled with their own toners and inks
Standalone supply stores such as Cartridge World and Internet vendors are growing very fast. These companies also refill old cartridges with less expensive inks
While HP has responded to this competitive threat by defending patents on its cartridges and creating their own programs to collect empty cartridges, continued growth from this sector will put pressure on both sales and margins of this business.
Worldwide PC Vendor Unit Shipments for 2009 and US PC Vendor Shipments for 4Q09[20]
Smartphones
HP's April 2010 acquisition of Palm has boosted the company's market share in the competitive smartphone market. Palm accounts for 5% of smartphone sales in the US and 1.5% smartphone sales worldwide. Prior to the acquisition, HP, which has been selling its own iPaq since 2007, has only had 0.1% of the market share. By 2012, that sales of smartphones, currently about equal to the annual sales of laptops, is expected to surpass total PC sales.
HP used to license Microsoft's Windows Mobile OS for its iPaq handsets. After its acquisition of Palm, HP also received Palm's webOS. Other competitors such as like Apple and RIM also control the hardware and software on its devices. However, other companies such as HTC, Motorola, Samsung, and Sony Ericsson use Google's Android OS on their phones.
Worldwide Mobile Telephone Sales and Worldwide Smartphone Sales by OS for 2009[21
HP's posted net revenue in 2009 was $115 billion, with approximately $40 billion coming from services. In 2006, the intense competition between HP and IBM tipped in HP's favor, with HP posting revenue of US$91.7 billion,[5] compared to $91.4 billion for IBM; the gap between the companies widened to $21 billion in 2009. In 2007, HP's revenue was $104 billion,[6] making HP the first IT company in history to report revenues exceeding $100 billion.[7] In 2008 HP retained its global leadership position in inkjet, laser, large format and multi-function printers market, and its leadership position in the hardware industry.[8] Also HP became #2 globally in IT services as reported by IDC & Gartne
Hewlett-Packard (NYSE: HPQ) is a diversified technology company that has reached several key milestones in recent years. In 2009, HP's revenue declined by 3.2%, following a 13.5% gain in 2008.[1]
The drivers of HP's recent success have been two-pronged. The company has undergone significant cost cutting measures since 2005. At the same time, the company has focused on driving growth in key areas such as software and services. Software and services are generally much higher margin than hardware. IBM, which generates most revenues from services, realizes operating profits nearly twice as high as either HP or Dell. This transition continued with HP's acquisition of business network producer Electronic Data Systems (EDS) in August 2008. This acquisition helped improve the weighted-average net revenue growth of HP Services division from 1.1% in FY07 to 5.6% in FY08.[2]
On March 5th 2010, Hewlett Packard revised its 1Q09 earnings due to a lawsuit against EDS, a company HP acquired in August 2008. The litigation brings HP's 1Q10 net income down from $2.32 billion to $2.25 billion . A London court ordered EDS to make an interim payment of $112 million to British Sky Broadcasting. HP will appeal the decision. [3]
On July 1st, HP completed its acquisition of Palm for $1 billion, or $5.70 per share, giving HP a foothold into the smartphone market.[4]
Company Overview
Business and Financial Metrics
In the fourth quarter of 2009, HP's revenue increased 8% to $33.3 billion. This quarter was the first for CEO Leo Apotheker, who had replaced Mark Hurd, the former CEO forced out on allegations of sexual harassment and expense report inaccuracies. Printer shipments increased 14%. Its profit increased 8% to $2.5 billion.[5]
Contents
1 Company Overview
1.1 Business and Financial Metrics
2 Business Segments
2.1 Personal Systems Group (34% of 1Q10 Revenue[10])
2.2 Imaging & Printing Group (20% of 1Q10 Revenue)[10]
2.3 Enterprise Storage & Servers (14% of 1Q10 Revenue)[10]
2.4 HP Services (28% of 1Q10 Revenue)[10]
2.5 Software (3% of 1Q10 Revenue)[10]
2.6 HP Financial Services (1% of 1Q10 Revenue)[10]
2.7 Smartphones
3 Trends and Forces
3.1 Imaging and Printing
3.2 Personal Computers
3.3 Expansion of Software and Services
3.4 Growth in Enterprise
4 Competition
4.1 Hardware: PCs and Servers
4.2 IT Services
4.3 Printing and Imaging
4.4 Smartphones
5 References
In the second quarter of 2009, HP's revenue increased by 13 percent to $30.85 billion. This increase was primarily due to a rise in sales of PCs and other hardware. Notebook revenue rose by 17 % and desktop revenue rose by 27%. PC replacement demand driven by Windows 7 is expected to grow throughout the second half of 2010 and the beginning of 2011.[6] Overall, HP reported a profit of $2.2 billion, up from 28% from $1.72 billion.[7]
In 1Q09, HP sales' rose 8% to $31.2 billion from $28.8 billion. Profit also increased from $1.9 billion to $2.25 billion. Profit and sales were primarily due to a 20% jump in computer and laptop sales which accounted for $10.6 billion and an increase of 4% in the imaging and priting sales to $6.2 billion. [8]
Since 2005, HP has been growing at a Compounded annual growth rate - CAGR of 5.73%. HP has been cutting its operating costs since 2005, when operating expenses accounted for approximately 96% of total revenue. The bulk of these measures fell under the goal of streamlining the company's structure and included removing several layers of management, phasing global operations into all of HP's business segments, and outsourcing more production to subcontractors(by mid-2008, more than half of HP's PCs are built entirely by subcontractors[9]).
Business Segments
HP is the global leader in Personal Systems and Imaging and Printing. The company HP provides a wide range of products and services to its customers and is divided into six business segments:
Personal Systems Group (34% of 1Q10 Revenue[10])
Hewlett-Packard is the world's largest manufacturer of personal computers in the world in terms of unit volume and annual revenue. Its Personal Systems Group (PSG) is responsible for the development and sale of HP's commercial and consumer PCs, workstations, handheld devices, digital entertainment systems, and other related services and accessories.
In 2009, this division's revenue increased 20% from the previous year to $10.6 billion. The the average sale price (ASP) declined less on HP's line of notebooks and PCs this year than the previous year . Furthermore, the US PC market grew by more than 20% in 1Q10 and HP increased its market share in this division by 4%. The operating profit of this segment was $530 million, or 5% of the revenue.
Imaging & Printing Group (20% of 1Q10 Revenue)[10]
Hewlett-Packard is the leading provider of imaging and printing systems in the world. HP's Imaging and Printing Group (IPG) provides consumer and commercial printer hardware, printing supplies, printing media and accessories, and scanning devices.
In 1Q10, consumer printing shipments grew by 18% and commerical printing shipments grew by 11%. Sales of wireless printers doubled and ink sales tripled. Total printer unit shipments grew 16%, the largest increase in three years.
Enterprise Storage & Servers (14% of 1Q10 Revenue)[10]
HP is one of the leading providers of servers in the world, offering a wide range of servers and storage products and solutions for small businesses and larger corporations. The Enterprise Storage and Severs (ESS) segment offers industry standard servers, business critical systems, and storage products and services. The recent acquisition of EDS will make HP the second largest producer (after IBM) of data systems and data processing for businesses and large enterprises.
In 1Q10, ESS's revenue grew 11% to $4.4 billion due a 27% revenue increase in industry standard servers. Industry standard serves include entry-level and mid-range ProLiant servers. Average selling prices continued to increase.
Contribution to Revenue[10]
HP Services (28% of 1Q10 Revenue)[10]
This segment offers a large variety of information technology services, including technology services, consulting and integration services, and managed services. Technology services range from individual product support to business technology solution services for global corporations. Consulting and Integration covers the design and execution of technology solutions for customers. Managed services include outsourcing, managed web services and other services. HP Services works with HP's IPG and ESS segments in order to provide customers with full, end-to-end business solutions.
Revenues from this division was $8.7 billion, a decline of 1% from the previous year. The IT outsourcing business grew 2%; Application Services declined 8%, BPO declined 3%, and Technology Services declined 2%. This segment's operating profit 1Q10 improved $240 million to $1.4 billion. 15.8% of revenue due to the synergies from the EDS acquisition.
Software (3% of 1Q10 Revenue)[10]
HP's Software segment provides management software solutions that assist large companies in managing their operations and information technology infrastructure through HP's OpenView software brand. HP Software's other major offering is the OpenCall brand which offers a platform for utilizing voice and data services for network providers. HP recently acquired the Mercury Interactive Corporation, an IT management software and services company, in order to further expand the offerings of HP's Software segment.
In 1Q10, HP Software's revenue remained the same at $878 million compared with the prior year. However, the segment increased its operating margin by 310 basis points to 19%.
HP Financial Services (1% of 1Q10 Revenue)[10]
Hewlett-Packard offers financing, leasing, and other financial management services for its larger enterprise customers, small businesses, and educational and governmental customers in order to allow its customers to purchase complete end-to-end information technology solutions.
In 1Q10, this division grew 13% to $719 million. Its operating margin increased 290 basis points to 9.3%.
Smartphones
On April 29, 2010, HP acquired Palm for $1 billion in cash. HP paid $5.70 a share, a 23% premium, for Palm. Palm, famous for its Palm Pilot, has seen heavy competition from Apple's iPhone, RIM's Blackberry, and other smartphones running Google's Android software. Palm, whose newest phones Pre and Pixi were largely unsucessful, has seen its share price drop 53% in the past year and it has been unprofitable since 2008.[11]
Trends and Forces
Imaging and Printing
Hewlett-Packard's most profitable venture is their Imaging and Printing Group, which the company operates like a razor-and-razor-blade business model. It has been estimated that HP sells consumer printers at a loss, commercial printers at a small profit and its replacement ink cartridges at with a margin over 50%. As a whole, the Imaging and Printing accounted for 25% of total revenue for FY08, with supplies being the only sector in this group that grew between FY07 and FY08 in net revenue.[12]
The business model for this group makes the revenue stream volatile. The lowering margins in the commercial and customer hardware market have affected the total revenues generated by this group. For large scale commercial businesses, HP introduced a its high-end digital printer offering (called Indigo) and acquired Scitex Vision, a specialty company ultra-wide digital printing. HP's strength is printing and imaging is threatened by increased competition from laser printers and inkjets.
Personal Computers
The global downturn has affected the growth rates in revenues for both the notebook and desktop PC markets. A 18.9% decrease in revenues at 30th April 2008 ($8.1B) when compared to 30th April 2009 ($10.1B).[13] In spite of these current losses, HP's outlooks looks positive as analysts predict the market to increase in 2010 as the global economy improves.[14]
Expansion of Software and Services
An integral part of a company's infrastructure is the software and services that helps manage the company and the servers it runs on. To grow their offerings in this area, HP acquired EDS in August of 2008. This acquisition had a direct impact on the revenue generation for this group.
However the global recession has taken its toll on this group as well with 15.3% loss in revenue for FY09Q1 when compared in FY08's 1st quarter results.[15]
Growth in Enterprise
HP's Enterprise Servers and Storage division is the main segment through which Hewlett-Packard offers information technology infrastructure products and management to businesses. The ESS group accounted for 18% of total revenue in 2007 with a segment operating margin of 10.5%. In order to increase their leading market share in the server industry, HP has been changing their product mix within the ESS group to adjust to the industry trends.
One of the company's key leverage points is its existing relationships with enterprise customers for its printer and PC businesses. With a broadening portfolio of hardware and even services, HP can move to provide full technology offerings to its customers. On the down side, enterprise-level capital spending is highly sensitive to changes in the economy and technology is often one of the first items cut during economic declines. The US financial services sector is expected to decrease orders due to the credit crunch. At the same time, HP reported that it was largely unaffected by this in Q4 2007 because of their relatively small exposure to the financial services sector.
In May 2008, HPQ completed plans to acquire Electronic Data Systems (EDS) for $13.9 billion,[16] a 32.5% premium over EDS's share price before this potential deal was announced. This would make HPQ the number two producer of large-scale corporate data systems, allowing it to compete with number one, International Business Machines (IBM), more effectively. Additionally, HPQ and EDS have different product lines and customer bases which would allow many "cross-selling opportunities."[17] Despite this potential size advantage, there are several possible problems with this acquisition. First, HPQ paid a considerable premium for EDS, which suffered a 62% decline in profits for Q1 2008, and has had very limited profit growth over the past 5 years. Second, the market for large corporate data systems is highly competitive, resulting in low profit margins. Finally, EDS has 140,000 employees, the vast majority of which are expensive US workers, leading to high labor costs, which is a serious handicap in this cutthroat market segment where more and more work is being transferred to lower cost programmers in places such as India. The two companies will be totally integrated over a three year period, with management expecting to cut $1.8 billion a year in costs through the merger.[18]
H-P's enterprise services business is aggressively moving toward automating data centers and making other operational changes in its IT services business and expects to spend $1 billion in this regard.This move, along with the second phase of cost cutting resulting from integration with EDS, where H-P can combine data centers, IT networks and other operations, resulted in HP announcing 9000 jobs cut on Jun 01, 2010. [19]
Competition
Although HP's main competitors are Dell and IBM, each of these companies has a different focus area. Dell makes most of its money on PC and server hardware, while IBM has shifted towards a IT services provider. HP provides both of those offerings but maintains a large cash cow business with its printers, which generate half of all operating profits.
Hardware: PCs and Servers
In terms of revenue, HP is the largest producer of personal computers with Dell coming in at a close second. However the PC market is fragmented with the top ten companies accounting for only approximately 57% of global desktop sales. The notebook market is more concentrated with the top ten companies controlling over 80% of the market. In the server market--which is generally higher margin that PCs--HP is a close second to IBM, with Dell ranking third.
IT Services
IBM is a far more profitable company than either HP or Dell. This can largely be attributed to IBM's 40+% gross profit rate from its high-margin services business, which generates over 50% of its overall revenue. As a more profitable enterprise, IBM has the opportunity to reinvest in its business and take back the leading spot in the IT industry.
Printing and Imaging
While HP's two largest competitors are IBM and Dell, neither of these two companies produce printing and imaging hardware. This is one of the largest differences between HP and its competitors because such large portions of revenue (27%) and operating margin (over 40%) come from HP's Imaging and Printing segment.
The printer market can be divided into two product categories--inkjet printers and laser printers--where HP's major competitors include Lexmark, Canon, Epson, Xerox and Samsung. HP is the market leader for both types of printers.
A majority of revenue and nearly all profits in the Printing and Imaging segment come from the sale of ink cartridges, which extend the revenue streams from a printer hardware customer by 3 to 4 years. As such, one of the biggest threats to their cash cow business is the emergence of cartridge remanufacturers or refillers, especially for the inkjet market (laser cartridges are much more complicated). Various companies are getting into this game and cutting into HP's cartridge sales.
Office supply retailers such as Staples and Office Depot have started to sell their own private-label ink cartridges, which are old HP cartridges filled with their own toners and inks
Standalone supply stores such as Cartridge World and Internet vendors are growing very fast. These companies also refill old cartridges with less expensive inks
While HP has responded to this competitive threat by defending patents on its cartridges and creating their own programs to collect empty cartridges, continued growth from this sector will put pressure on both sales and margins of this business.
Worldwide PC Vendor Unit Shipments for 2009 and US PC Vendor Shipments for 4Q09[20]
Smartphones
HP's April 2010 acquisition of Palm has boosted the company's market share in the competitive smartphone market. Palm accounts for 5% of smartphone sales in the US and 1.5% smartphone sales worldwide. Prior to the acquisition, HP, which has been selling its own iPaq since 2007, has only had 0.1% of the market share. By 2012, that sales of smartphones, currently about equal to the annual sales of laptops, is expected to surpass total PC sales.
HP used to license Microsoft's Windows Mobile OS for its iPaq handsets. After its acquisition of Palm, HP also received Palm's webOS. Other competitors such as like Apple and RIM also control the hardware and software on its devices. However, other companies such as HTC, Motorola, Samsung, and Sony Ericsson use Google's Android OS on their phones.
Worldwide Mobile Telephone Sales and Worldwide Smartphone Sales by OS for 2009[21