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HP Hits the High End of Expectations for Q1, Enterprise Storage and Servers Posts Operating Profit

Hewlett-Packard kept to its word and indeed did hit the high end of its estimate range for sales in the first fiscal quarter ended January 31, with sales of $19.5 billion, up 9 percent compared to this time last year. Net income was up 30 percent at $1.1 billion, with earnings of 30 cents a share, up 25 percent. Notably, the Enterprise Systems unit, which as the name suggests, sells HP's wide portfolio of Unix, Windows, Linux, and proprietary platforms and related storage and systems software, posted an operating profit after losing money for a few quarters at the operating level.

Specifically, the Enterprise Systems unit posted sales of $3.9 billion in the quarter, up 5 percent compared to last year, with an operating profit of $108 million, significantly better than the $82 million loss the unit had a year ago in fiscal Q1 2003. HP's software unit dragged down this sector, with an operating loss of $46 million, while the server and storage part of this unit booked an operating profit of $154 million. Unix server sales were down 13 percent in the quarter, with intense pricing pressure at both the high ends and low ends of the Unix market. Moreover, with HP known to be readying its PA-8800 dual-core processors, customers were not exactly inclined to buy before they saw what HP would do with pricing on these new CPUs and what kind of performance they would deliver. HP 9000 revenues were flat year-to-year, which is a sort of victory given the transition to the PA-8800, but sales of AlphaServers (running either OpenVMS or Tru64 Unix) were down 32 percent despite the rollout of the "Marvel" line of EV7 Alpha processors in the fall. The Marvel machines included a top-end 64-way GS1280 using 1.15 GHz processors and a new memory architecture that offer a factor of 16 greater memory bandwidth that significantly boosts performance for OpenVMS and Tru64. HP danced around how well the Itanium-based Integrity line did, saying that Superdome (the top-end Integrity machine) orders were up 52 percent and that sequential sales in fiscal Q1 2004 were up 60 percent over fiscal Q4 2003. Almost by default Integrity sales had to be up, and by a huge percentage, since Integrity sales were a miniscule part of HP's revenues last year. Overall, the Business Critical Systems unit--comprised of Integrity, Alpha, and NonStop systems--posted sales of $901 million in the quarter. Sales of X86-based ProLiant servers were up 15 percent to $1.96 billion, said HP, with shipments up 23 percent.

HP said that high-end and midrange storage sales were up 14 percent, driven in large measure by the new StorageWorks Enterprise Virtual Array, which more than doubled in sales since last year. But high-end arrays that HP rebrands from Hitachi were weak, and the company's overall tape business declined by 5 percent as it exited the OEM tape library business. Overall, disk and tape storage sales (what HP calls Network Storage Systems) were $862 million, down 2 percent to compared to Q1 2003. Oddly enough, software sales were up 9 percent to $196 million, with HP hitting the highest software sales it has had in any first quarter. But these increased sales came at a cost, since this business posted a significant operating loss of $46 million.

The execs at HP might want to think about changing the fiscal year at HP, since it hurts its financials relative to rival IBM. HP's server sales were up 7 percent in Q1 and storage was down 2 percent. But these numbers include January, the worst month in the year to sell anything. If you recast HP's financials for an October-December 2003 quarter that matches IBM's, HP's server revenues were up 19 percent compared to IBM's 16 percent, and its storage sales were up 12 percent compared to IBM's 14 percent.

Sun Promotions Aim to Keep Users Buying UltraSparc-III as They Await UltraSparc-IV

Maybe Sun Microsystems jumped the gun a little bit on its "Jaguar" UltraSparc-IV announcements three weeks ago. It is understandable that Sun would want to show off its dual-core UltraSparc chips at the same time rival Hewlett-Packard was launching its dual-core PA-8800 processors for its HP 9000 Unix server line. Sun said at the Jaguar launch that it wouldn't ship new 24-way Enterprise 4900 or 48-way Enterprise 6900 servers until April, and that the 24-way (single domain) Enterprise 2900, 72-way Enterprise 20000, and 144-way Enterprise 25000 servers would not start shipping until sometime this month. But when you try to get an estimated ship date for any of these machines from Sun's online store, they all say "Call Sun." This means that supply is constrained, whether it is through a very limited supply or very high demand. Either way, it means it is taking longer than Sun would like for customers to get a new Jaguar server.

To help keep sales humming as it ramps up the Jaguar processors and as customers mull over their options, Sun this week launched a bunch of promotions to make it easier for customers to not worry about the Jaguars so much and just buy today if they need capacity.

Specifically, Sun is offering a trade-in allowance of up to 40 percent, good toward the purchase of upgrades to UltraSparc-IV processors, of the price that customers shell out to buy an UltraSparc-III generation Sun Fire 4800, 6800, 12000, or 15000 server. Customers who buy one of these "Cheetah" UltraSparc-III machines before June 30, 2004 can upgrade to the UltraSparc-IV under this deal until June 30, 2005.

Under a separate promotion that lasts only until June 13, 2004--that's two weeks before Sun's fiscal year end, when the company tries to push sales like crazy--customers with vintage Sparc/Solaris iron, competitive Unix products from IBM, Hewlett-Packard, and others, or any non-Sun server (including mainframes and X86 boxes) can get a 30 percent trade-in allowance off the list price of a Sun Fire 6800 server they buy to replace this aging Sun or non-Sun server gear.

Sun is also offering a trade-in credit worth up to 35 percent of the list price of an upgrade to a new 1.2 GHz UltraSparc-III uniboard from prior generations of UltraSparc-III uniboards. It is unclear if Sun is giving more generous credits for customers with older uniboards (perhaps running older 750MHz or 900MHz Cheetahs) than for more recent boards, which use 1.05GHz Cheetahs. What is clear is that this deal only runs through the last business day of Sun's fiscal third quarter, which is March 27, 2004. Sun wants customers to upgrade to the latest UltraSparc-III processor, and it wants them to do it now.

Finally, will chop the cost of its StorEdge 6000 midrange and high-end disk arrays by 30 percent if customers buy the storage as part of a complete Sparc system acquisition. Sun obviously wants to drive up the attach rates of storage on its own brand of servers among its customers, and it has to compete pretty hard against EMC and others to do this. This Sun Fire/StorEdge promotion runs through September 30, 2004.

In addition to these three trade-in promotions, Sun added that the new UltraSparc-IV server line had been added to its Upgrade Advantage Program, which is a special package of guaranteed server upgrades, financing, asset management, and extended warranties that seek to normalize IT expenditures without going to a full-blown utility computing model. Some companies are more comfortable with familiar financial controls for upgrade cycles and are not yet ready for the computing on demand world that all the major Unix players have envisioned. That said, until you actually engage with Sun, you can't really find out the feeds and speeds of the UAP deal, which is about as vague as any other asset management and financial program any of Sun's competitors put out.

SCO Sues First Unix, Linux Users Relating to IBM Lawsuit

The SCO Group, which is embroiled in a number of different lawsuits that it says are aimed at protecting its intellectual property and copyrights relating to the Unix operating system, this week sued two customers--one running Unix and one running Linux--for violating its rights by using AIX or Linux without proper licensing.

SCO has been threatening for months that it would take this action, which it believes it must do to protect its rights over the Unix platform. IBM, which is being sued by SCO for $5 billion for allegedly violating its Unix license by moving Unix source code into Linux, has said it did no such thing and that its AIX license is irrevocable. And Novell, which sold SCO the rights to Unix a number of years ago, says that it never sold SCO the copyrights to Unix, and has absolved IBM and the Linux community of any wrongdoing, should there have been any. SCO is attempting to use two levers to exert its power over Unix. One is taking on IBM directly in the courts, and the other is to take on the Linux community indirectly through its installed base. In January 2004, SCO sent 1,500 letters to Linux shops telling them that they could license SCO's Unix content that it asserts is lurking inside Linux for $750 per processor and avoid potential legal battles. Thus far, only one company has admitted to the IP licensing, a small service provider called EV1Servers.Net, which said this week that it had bought the IP license.

On the Unix front, SCO has chosen as its first AIX target none other than the car maker DaimlerChrysler. SCO sued DaimlerChrysler in Michigan state court this week. SCO has asked for the company to certify that its use of the Unix operating system is in accordance with the terms of the licensing that SCO offers to all Unix makers who have created Unixes based on the AT&T System V kernel, which it controls though acquisition. When SCO asked repeatedly for these certifications, DaimlerChrysler did not even reply. Hence, SCO decided to sue for an injunctive remedy in the courts through a jury by trial because DaimlerChrysler is violating the terms of its Unix license.

On the Linux front, SCO's first target is automotive parts retailer AutoZone, which is being sued in federal court in Nevada for violating SCO's copyrights because it is using Linux in its data centers and stores. AutoZone is incorporated in Nevada even though it is for all practical purposes headquartered in Nashville, Tennessee. SCO wants immediate injunctive relief to compel AutoZone from continuing to use Linux and is seeking damages in a trial by jury.

Intel Cranks Up Xeon Clocks, Caches

Several weeks ago, when Intel announced its 64-bit extensions to the Xeon family of processors, the company said that it had delivered a boosted Xeon DP processor and two more variations on the "Presontia" theme. These announcements got lost in the shuffle, so Intel talked about these processors this week as it delivered a new "Gallatin" Xeon MP processor for high-end servers with a larger 4 MB L3 cache memory and a 3 GHz clock speed. These are the engines behind the Windows and Linux server markets, but they are also used to support various Unixes, including a SCO UnixWare and OpenServer, the various BSD derivatives--FreeBSD, NetBSD, OpenBSD--as well as Sun Microsystems Solaris.

This is the end of the line for Gallatin, which will be followed by the "Potomac" 64-bit Xeons in early 2005. These peppier Gallatins announced this week will plug right into any machine that currently uses this family of Xeon MP processors. This includes four-way machines made by the big tier one suppliers--Hewlett-Packard, Dell, IBM, and Fujitsu Siemens--as well as myriad white box vendors who compete vigorously for business in the midrange X86 server markets. These Xeon MPs are also used in machines that couple 8, 16, or 32 processors together in a giant SMP cluster. They are not used in smaller two-way or uniprocessor machines, which have their own Xeon DP and Pentium 4 variants that run faster and offer better bang for the buck.

According to Alan Priestly, strategic marketing manager for Intel in the UK, Intel does not have any plans to add new Gallatin processors to the Xeon line in 2004 beyond the three processors that were announced this week. This is because it takes a long time to ramp up production processes on the Xeon MP chips, which are among the largest chips that Intel makes, and because the qualification processes that vendors go through take a long time because of the complexity of the midrange and enterprise machines that use them compared to entry servers that use Xeon DPs. That is why, says Priestly, the Xeon MP product launches tend to be on a six-to-nine month cycle. And knowing that Gallatin is the last of its line and that cycle time on launches, we now know that Intel is shooting for the Potomac kicker to Gallatin in early 2005. It looks like Intel is stretching the Gallatins for a bit longer than it might otherwise like. But Potomac is not going to do anyone much good until 64-bit versions of Linux, Windows, and Unix tuned for Xeon-64s are available anyway, so there is not much point in hurrying.

In any event, there are three new Gallatins, which all have 400 MHz front side buses like the other Gallatin and "Foster" Xeon MPs. (Foster was the original Pentium 4 Xeon chip for high end servers.) The new 3 GHz/4 MB L3 cache Gallatin replaces the 2.8 GHz/2 MB cache Gallatin, and has the same list price at $3,692 each in 1,000-unit quantities. Intel is also announcing a 2.7 GHz/2 MB part, which at $1,980 each in 1,000-unit quantities is half the price of the 2.8 GHz/2 MB part. A new 2.2 GHz/2MB part costs $1,177, less than a third the price of the 2.0 GHz/2 MB Xeon MP that was the top-end machine 18 months ago. While the performance boost is always a welcome thing at the high end of the Xeon MP range, the price/performance increases for slower chips is what makes Xeon MP processors affordable for a growing number of companies. At these prices, four-way computing with powerful machines is an option for companies who could not even have pondered it a few years ago.

Priestly says that customers moving from 2.8 GHz/2 MB Gallatin parts up to 3 GHz/4 MB Gallatins should see about a 15 percent performance boost on Java and other threaded applications, and about a 25 percent performance on ERP-style workloads that are sensitive to cache memory. In general, the other two Gallatins offer about 10 to 15 percent more performance than the other Gallatins they replace at the same price point but with lower clock speeds and 1 MB L3 caches.

According to benchmark results shown by Intel, the larger cache on the new Gallatins can increase the effectiveness of HyperThreading (HT) by a few percent because the cache decreases latencies in gathering data. HT boosted the performance of the TPC-C transaction processing benchmark by 10 percent on a four-way Foster Xeon MP running at 1.6 GHz and with a 1 MB L3 cache. On the 3 GHz/4 MB Gallatin, HT boosted performance on this box by 13 percent. On the SAP R/3 S&D benchmark, that same Foster machine saw only a 5 percent performance boost with HT activated, but the Gallatin 2.8 GHz/2 MB machine saw a 14 percent increase. Presumably a 3GHz/4MB part might even see an HT increase that is even larger. On the SPECjbb2000 Java benchmark, the Foster chips saw a 19 percent increase in performance, while the Gallatin 3 GHz/4 MB with nearly twice the clocks and four times the L3 cache only saw a 16 percent gain from HT.

The new Gallatin chips will be available starting this week, and have been validated by Intel's OEM partners, according to Priestly.

On the Xeon DP front, Intel has three new parts: a 2.4 GHz/1 MB chip, a 2.8 GHz/1 MB chip, and a 3.2 GHz/2 MB chip. Like the other past generations of Prestonia chips, these have a 533 MHz front side bus. The top-end 3.2 GHz/2 MB Prestonia has about a 10 percent performance benefit compared to the 3.06 GHz/1 MB Prestonia, according to Priestly, and at $1,043 each per 1,000-unit quantities, it carries a hefty 51 percent premium compared to that slower Prestonia, which costs $690. The new 2.8 GHz/1 MB Prestonia costs $455, the same as its 3.06 GHz/512 KB predecessor, while the new 2.4 GHz/1 MB Prestonia costs $316, the same as a 2.8 GHz/512 KB part.

This is the last in the line for the Prestonia chips, too, by the way. The next stop on the Xeon DP train is the "Nocona" Xeon chip, which is due in the second quarter and which will be the first Xeon chip to implement 64-bit extensions.

IBM Asks Sun to Take Java Open-Source

Echoing a sentiment that the editors at Guild Companies have expressed time and again, a letter from a top software executive at IBM to a senior executive at Sun Microsystems, the creator and controller of the Java programming language and runtime environment, has urged Sun to do the inevitable: to make Java open-source so it can better compete in the marketplace and see wider adoption.

The letter, penned by Rod Smith, vice president in charge of emerging technologies at Big Blue, was sent to Sun in the hope of getting the company to work with IBM to create an open source consortium that would manage the creation and extension of Java technologies. IBM has put a lot of its marketing might and internal software development behind Java, and it needs Java to succeed as much as--and maybe even more than--Sun. This approach is similar to the one that IBM took when it created the Eclipse tools consortium, which just broke free of Big Blue and which, incidentally, Sun declined to join because it has its own NetBeans Java tools project.

IBM has the right idea, but Sun has resisted years of people calling for Java to go open-source. A letter from IBM is very unlikely to change Sun's mind. This is particularly true because Sun, through the Java Community Process, has complete control over what goes into Java and what does not. In a consortium driven by open source ideals and programmers, those programmers with the best ideas would control Java. And right now, it is arguable that IBM has as many or more smart Java coders than Sun. Ceding control of Java to the open source community is, in effect, giving a lot of control to IBM, which is Sun's rival in selling Java-based tools, servers, and applications.

Justice Dept. Blocks Oracle's Bid for PeopleSoft

As we said it would do a few weeks ago, the Department of Justice's Antitrust Division has sued Oracle in an effort to block a hostile takeover of rival PeopleSoft, and Oracle has told the government and PeopleSoft that it will see them both in court.

Many people, including a number of us at Guild Companies, had thought that Oracle's intent in acquiring PeopleSoft was meant more to undermine PeopleSoft's $2 billion acquisition of rival J.D. Edwards. Several weeks ago, Oracle sweetened its bid to $9.4 billion in cash for all of PeopleSoft (presumably including JDE), and quite a number of people figured that that bid was just to save face so Oracle would not end up in the European and U.S. courts for trying to derail the PeopleSoft-JDE deal. When you launch a hostile takeover, you have to mean it; otherwise, judges and government regulators get very angry.

So even if Oracle were only trying to cause trouble for PeopleSoft (which is something the company vigorously denies), it would have to not fold at the first instance of trouble with the Justice Department, and proceed to court. Oracle has to behave as though it really did mean to purchase PeopleSoft, or it will face dire legal consequences. To that end, Oracle has extended its offer (which was set to expire on March 12) to June 25. The government, by the way, is proceeding against Oracle on the grounds of "relevant market" definition, and in the case of the PeopleSoft application market, the government is going to use a very restrictive definition of relevant market that in essence argues that with Oracle eating PeopleSoft, the only two big application providers in the enterprise would be SAP and Oracle.

The attorneys general of Hawaii, Maryland, Massachusetts, Minnesota, New York, North Dakota, and Texas have all joined the federal government in the lawsuit to block an Oracle takeover of PeopleSoft.