HP Poised For Further Growth

(Original post at my other blog)

HP on May 20th reported slightly-better than expected 2008 second-quarter numbers.   Revenue at $28.3 billion grew up 11% from year-on-year.   It also raised the year-end revenue guidance from $114.2 billion to $114.4 billion.   More financial details are available here.

EDS, Emerging Markets, Cost-Cutting – Great Confluence!
I believe that HP is on a solid ground to move to the next stage of sustained growth in the long term.    For me the confluence of the three themes - EDS, Emerging markets and HP's (or Mark Hurd's) track record in cost-cutting initiatives - looks particularly promising.

If, and that is an important if, HP can integrate EDS without a lot of indigestion, it is going to be a key growth driver for HP in the next decade or so.   With one swoop, HP not only added new expertise in Technology Services (specifically in Infrastructure Services) but also positioned itself very strongly in emerging markets.   At $14B EDS WAS a decent bargain.

Another reason I think HP will succeed in building much more in emerging markets like India, China etc is that these aren't new markets for them as such.   HP has already been in the market for a while, so there is enough local sales, service and cultural know-how.   Now with the purchase of EDS and the potential of bundling related services with its products, HP will be able to consolidate its position.   Also, the domestic IT market in countries like India and China is now growing at a faster pace than in developed countries.   Infrastructure Services is one area where IBM has won lot of large deals in the recent times in these markets.   With EDS' USP being Infrastructure Services, HP is in a much more solid ground to directly take on IBM in these markets.

Last but not the least - the cost-cutting opportunity is real.   EDS, as most people agree, has a lot of fat that can be trimmed.   Who better than Mark to turn it into a lean and mean machine again?   Cost-cutting goes very well with the strengthening of "offshore" presence where less-expensive labor will add to the profitability.   EDS already has a strong India presence.

While the next few quarters may not bring in ground-breaking revenues, HP does look very strong for the long term investments.   It is no-brainer that how HP integrates EDS will define its future for the next 5-7 years.