HP's problem with PCs, explained in three graphs

The announcement by Leo Apotheker that HP is "exploring options" around its Personal Systems Group (PSG) - might keep it, might spin it off, might sell it - has naturally got people wondering why the world's biggest seller of Windows PCs would want to get out of a market when it's leading it.

The answer's simple, once you delve into HP's financials, which I've examined going back to the November 2004-January 2005 period (officlally, the first quarter of its 2005 financial year). PSG is the worst-performing division in terms of profit margin. It's dragging the rest of the business down.

You can see it here with three graphs. First, here's HP's revenues by division:

HP revenue by division, Q105-Q311: PSG is the green chunk. Amounts in millions.

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PSG looks pretty good - in fact, by revenue, it's the biggest, with only Services (the blue chunk) coming close.

But now we turn to profits. Here are the profits, in monetary terms (ie millions of dollars):

HP profits by division in monetary terms. Services in blue, Imaging in purple, PSG in green. Amounts in millions.

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Suddenly it's clear that while PSG generates lots of revenue, it doesn't do the same when it comes to profits. (My calculation is that it sells about 48m PCs per year for an average of $800, on which it makes $40 profit each.) By contrast Services and Imaging & Printing (blue and purple respectively) generate much more profit per dollar of revenue. Perhaps not surprising, because both rely a lot on HP's own in-house expertise - unlike the Windows PCs, which use someone else's software (mostly) and hardware that is commoditised.

The picture becomes even clearer once you look at the percentage profitability of each division - its profit as a percentage of revenue. Now, PSG is not the biggest, but the smallest; an average, over the period, of just 4.6%, compared to 12% for Services and over 15% for Imaging & Printing.

HP divisional profits as percentage of revenue. Services blue, Imaging & Printing purple, PSG green.

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The upshot of all this is that if HP were to ditch PSG without having any effect on its other divisions (a big proviso, since arguably PCs are sometimes useful to win Services contracts) then its profit margin would improve overall from an average over those 27 quarters of 10.1% to 12.7%.

Doesn't sound much - but when you're a company doing $30bn per quarter, these things add up. True, HP would only be a $21bn per quarter company if it dumped PSG – but it would have better earnings per share, which would mean better dividends, and the stock price would rise. Which is what chief executives are meant to make happen, aren't they? (Ignoring for a moment whether it makes sense.)

No doubt people inside HP know these graphs just as well - and they know how much benefit the PSG brings, or doesn't bring, to other divisions. The motive for sticking with PSG may be there. Perhaps there's a brilliant plan internally to boost the margins from PSG. (Run WebOS instead of Windows?)

But for now, those graphs tell the tale. Even for the biggest PC seller in the world, personal computers aren't a great business.

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