HP Shakes Up Management After Q3 Decline in Storage, Server Revenue

Updated: Hewlett-Packard saw revenues grow overall during its third fiscal quarter, but its enterprise servers and storage unit took a beating, prompting management changes in that group.

Hewlett-Packard Co. saw revenues grow in most business segments during its third fiscal quarter, but its enterprise servers and storage unit took a beating, prompting management changes in that group.

HP, of Palo Alto, Calif., was scheduled to release earnings next week but issued preliminary numbers early Thursday morning.

During the quarter that ended July 31, revenues in the Imaging and Printing, Personal Systems, HP Services and Software groups grew between 8 percent and 19 percent. Overall, revenue grew 9 percent over the same three-month period last year, to $18.9 billion.

However, revenue in the Enterprise Servers and Storage—which includes the companys ProLiant line of x86 servers as well as its high-end Integrity, PA-RISC and Alpha systems—fell 5 percent. In addition, it lost $208 million, greater than the $20 million loss during the same period last year.

"Although we are satisfied with our performance in Personal Systems, Imaging and Printing, Software and Services, these solid results were overshadowed by unacceptable execution in Enterprise Servers and Storage," Chairman and CEO Carly Fiorina said in a prepared statement. "We are therefore accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter."

In an e-mail to HP employees Thursday, Fiorina announced an overhaul of the management of the companys Customer Solutions Group, or CSG, a unified sales force responsible for all enterprise, small and midsize business and public sector accounts. The unit was created in May when HP folded its services, software, systems and storage groups under a single umbrella, the Technology Solutions Group.

Peter Blackmore was ousted as executive vice president of the CSG; he was replaced by Michael Winkler, who also retains his duties as chief marketing officer. Jack Novia, who was senior vice president and general manager of the Technology Solutions Group, will replace Jim Milton as senior vice president and managing director for the Americas region of CSG. Kasper Rorsted was removed as senior vice president and managing director for the Europe, Middle East and Africa region and replaced by Bernard Meric, who had served as vice president of the companys Imaging and Printing Group in that region.

Blackmore, who came to HP from Compaq, had served as executive vice president of the Enterprise Systems Group until May, when Executive Vice President Ann Livermore was named to head the new Technology Solutions Group.

Within the servers groups, revenues for the Industry Standard Server, which includes systems powered by Intel Corp.s Xeon and Advanced Micro Devices Inc.s Opteron processors, jumped 2 percent. However, for the Business Critical Servers unit, revenues declined 8 percent to $828 million, with revenues for the Alpha and NonStop systems declining 32 percent and 25 percent respectively. Unix revenue was up 8 percent, according to the company.

In addition, total storage revenue dropped 15 percent to $709 million for the quarter.

HP officials pointed to several reasons for the shortfall, including changes the company is making to its order processing and supply chain systems, which they said were more disruptive than expected. Also, results in Europe were hurt by channel management problems, including compensation issues, overly aggressive pricing and a transition to a centralized claims process.

HPs high-end server business has been a particularly thorny problem for the company since its acquisition of Compaq Computer Corp. more than two years ago. The business suffered through several consecutive losing quarters, although it has been profitable in recent quarters.

Its also undergoing tremendous change as the company standardizes on Intels 64-bit Itanium architecture. The company is moving along with plans to move all of its high-end servers—including the Alpha systems, NonStop servers and HP9000 machines, which run HPs HP-UX Unix operating system and currently are powered by the companys PA-RISC processors—to the single-chip architecture.

/zimages/5/28571.gifClick here to read about HPs upcoming Itanium-based blade servers.

Frank Gillett, an analyst with Forrester Research Inc., said HPs high-end server and storage business faces some of the same market pressures as their counterparts at IBM and Sun Microsystems Inc.: IT spending may be increasing, but where the spending is going is shifting.

Businesses are buying more of the less-expensive x86 systems—particularly those with Advanced Micro Devices Inc.s Opteron and Intel Corp.s new Nocona 32-bit processors with the 64-bit extensions—as well as spending money on automation and other management software that enhance the efficiency and performance of the lower-end servers. Businesses have been telling Forrester that they expect to spend 2.4 percent more for IT this year than last; the research firm thinks that could go up to 6 percent, Gillett said.

For HP, these market pressures are only aggravated by the fact that the company is trying to migrate all of its high-end systems onto the Itanium platform, something neither IBM nor Sun have to worry about, Gillett said. The company also has to show that it can fight its server battle on two fronts.

"The market challenges that are in place right now for HP are trying to compete with Dell in the commodity market while also filling out the mix to compete in the full-service high-end [market] with IBM," said Gillett, in Cambridge, Mass.

For the fourth quarter, HP estimates revenues of between $21 billion and $21.5 billion.

Editors Note: This story was updated to include information about management changes and comments from Forresters Gillett.

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