HP's Unix Biz Is Flat in Fiscal Q1, Hurd Disappointed

Published: March 1, 2007

by Timothy Prickett Morgan

One down, three to go. Hewlett-Packard, which is now the largest IT vendor in the world, turned in the first quarter of its fiscal 2007 and the results were good. The company managed to boost revenues in the quarter, which ended on January 31, to $25.1 billion, up 11 percent, and even better for Wall Street, net earnings came to $1.5 billion, up 26 percent. This is one of the best season openers that HP has had in many years. But the company's Unix server business did not grow.

At the very moment when I was on winter break with my family in the beautiful ski resort town of Taos, New Mexico, praying that I didn't kill myself on the steep slopes, Mark Hurd, HP's chairman and chief executive officer, and HP's new chief financial officer, Cathie Lesjak, held a conference call with analysts to discuss the results for the first quarter. This is Lesjak's first time co-hosting a call; she replaced long-time HP CFO, Bob Wayman, a few months ago.

HP's Enterprise Storage and Servers group booked sales of $4.5 billion in the quarter, up 5 percent compared to the first quarter of fiscal 2006. The Industry Standard Server unit within this group, which peddles ProLiant rack and tower servers as well as BladeSystem blade servers, accounted for $2.7 billion in sales, increasing by 10 percent compared to sales levels a year ago. BladeSystem sales, after languishing for many quarters, took off in the wake of the June 2006 launch of the new c-Class blade servers, which are more dense and have more useful gadgets than the prior blades; sales were up 45 percent in this segment, according to HP. (However, this still remains a small piece of the server revenue pie at HP and IBM, the other main contender in the blade space.)

The other side of the HP server house, the Business Critical Systems unit, is seeing mixed results as it has for years. The BCS unit accounted for $860 million in sales, declining 6 percent from last year's Q1, even after Itanium-based Integrity machine sales rose by 75 percent. The declines in sales for PA-RISC and Alpha systems, the old HP and Compaq/Digital machines that were replaced by the Integrity line several years ago. Integrity servers, helped considerably by the new "Arches" and "Titan" chipsets from HP and the dual-core "Montecito" Itanium 9000 processors from Intel, generated $470 million in sales in Q1. When you do the math, that means sales of PA-RISC, Alpha, and NonStop servers together fell by 40 percent to $390 million in the quarter. To just balance, HP needed to sell around $60 million more in Integrity sales in the quarter.

"HP-UX revenue was relatively flat year-over-year, offset by continued declines in Tru64 Unix and NonStop systems," Hurd explained on the call. "We can do better in this business, and we are focused on driving improved revenue growth through better sales execution, account coverage and installed base leverage." The BCS unit also includes MIPS and Itanium versions of the NonStop fault tolerant server line. When pressed to give some color on what happened in the quarter, Hurd danced a bit. "I am just disappointed and we can do better than we're doing," he said. "And part of it is aligning our demand better, and we had some deals that slipped. I can tell you a whole set of long, sad stories but don't think you would have time nor care." The delay in getting HP-UX 11i v3 and new entry Itanium servers out the door--which should have been shipping last summer--surely didn't help the quarter, either. (I said that; Hurd wouldn't.)

HP's StorageWorks division, which includes disk and tape array products, grew sales by 3 percent to $950 million in the quarter. Sales of midrange EVA storage arrays rose by 18 percent in fiscal Q1, but high-end XP disk arrays and tape products declined, offsetting this growth.

Operating profits in the Enterprise Storage and Servers unit kept growing again this quarter, hitting $416 million (9.3 percent of revenue in this group), up 28 percent from the $326 million operating profit HP had in this unit a year ago. Nearly half of the revenue gain HP had in the quarter went to the middle line, in other words.

HP's Personal Systems Group did gangbusters, with sales up 17 percent to $8.7 billion and unit shipments up 19 percent. Notebook revenues were up 40 percent, but desktop sales fell by 1 percent. Businesses spent 8 percent more this time around for PCs and notebooks, but consumers spent 28 percent less, suggesting that consumers are looking for low cost, not features. This flies directly in the face of Microsoft's Windows Vista launch. Vista is a serious resource hog.

As usual, Imaging and Printing Group was the profit engine of HP, with sales up 7 percent to $7 billion in fiscal Q1. Operating profits in IPG came to $1.1 billion, up 13 percent, which means HP is keeping costs under control and is figuring out ways to wring profits from printers, scanners, cameras, and other gear even as it faces intense competition. HP's Services group had sales of $3.9 billion, up 5 percent, and an operating profit of $414 million, up 41 percent. Clearly, changes HP has made to rejigger its services business are working with a swing like that in operating profit. HP's Software group remains a tiny piece of its business, but grew 81 percent to $550 million, thanks largely to its acquisition of Mercury Interactive last year. Excluding Mercury, HP's software sales climbed 7 percent in the quarter.

Lesjak said that HP expected sales for the full fiscal 2007 year, ending October 31, would be between $98 billion and $99 billion, and you can bet that HP wants to try real hard to be the first IT vendor in history to break $100 billion in sales in a year. The company anticipates being able to bring between $2.35 to $2.40 per share to the bottom line for the year.

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