HP’s enterprise services business is undergoing a decline in an otherwise growing market
Enterprise services, or IT services, are an important component of the overall technology sector. According to Gartner and as the chart below shows, worldwide spending on IT services is expected to increase from $922 billion in 2013 to $964 billion in 2014, making it one of the fastest-growing segments in the technology sector. HP (HPQ) derives about 20% of its revenues from this segment, although the segment’s revenues declined 7% year-over-year to $5.7 billion for the quarter ending April 2014. This segment is divided into two business units—Infrastructure Technology Outsourcing and Application and Business Services. HP competes with IBM (IBM) and Accenture (ACN) in this space.
The IT Outsourcing unit derived about $3.6 billion in revenues in the quarter ending April 2014 and provides services to clients’ technology infrastructure, such as data center management, IT security, and cloud computing. The Application and Business Services unit derived $2.1 billion in revenues and helps clients manage and maintain their software applications for uses such as customer relationship management, finance and administration, human resources, and payroll.
Softness in new signings led to a decline HP’s Enterprise services revenues
During the company’s conference call to announce earnings for the quarter ending April 2014, HP’s management mentioned that they’re facing a longer turnaround time to the tune of 18 months or two years to close a deal. Management also mentioned that, in addition to bigger IT outsourcing deals, they’re now also focused on short-term projects for customers’ strategic needs. The SPDR Morgan Stanley Technology (MTK) and First Trust Exchange-Traded Fund II (SKYY) are some of the ETFs that have high exposure to HP.
HP is encouraged by recent new signings
HP’s management mentioned that although the enterprise services business declined in the quarter, they were encouraged by new wins. Management observed, “While total signings were down over the prior year strategic enterprise services bookings growth is encouraging and we saw good new wins in the quarter. For example, the U.S. Department of Homeland Security awarded HP a Cyber Security contract worth up to $32 million and Belgium’s Flemish Government awarded a seven year of €500 million contract to HP and Belgacom to offer ICT services to all local and prudential government entities. The program will give citizens, access to information and services through a virtual private cloud solution.”