HP on a roll, but challenges await in 2009

Weakening economy, uncertainty over EDS acquisition will challenge HP

Still, HP attributed much of its fourth quarter gains to revenue from EDS. Without EDS, HP's net revenue would have grown only 5 percent year over year and only 2 percent when adjusted for currency effects.

HP is integrating EDS into the vendor's Technology Solutions Group, and says it will be able to cut more than US$1 billion in fiscal '09 by slashing corporate overhead related to redundancies between HP and EDS.

While EDS will lower HP's operating expenses as a percentage of revenue, the acquisition will also have a negative impact on gross margin, Lesjak says. There is also no guarantee that customers will react positively to the integration of the two companies.

"We are concerned about HP's plan to use EDS to 'sell and deliver more integrated (i.e. HP) solutions,'" Pund-IT analyst Charles King writes. "This strategy should work pretty well with HP's existing enterprise clients but is likely to be considerably less welcome among existing EDS clients."

HP's strategy appears to run counter to IBM's services approach, which King says allows customers to use whatever hardware and software they need regardless of vendor.

HP also risks alienating partners if the vendor does not take a neutral approach to third-party products, King writes.

"Using EDS to promote integrated HP solutions whenever and wherever possible will flatly not play well with EDS's other IT vendor partners, who have been used to evenhanded treatment," King writes. "Be certain those partners are closely watching what HP is planning for EDS."

The IDG News Service contributed to this report.

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