News & Insights for the AI Journey|Wednesday, July 17, 2019
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HP Systems Sales Rebound, But Profits Under Pressure 

The good news is that Hewlett-Packard is growing its X86 server business faster than the market at large again. The bad news is that a very large hyperscale server deal and an unfavorable mix in sales of ProLiant machines has put the squeeze on profits.

In the company's fourth quarter of fiscal 2013 ended in October, HP said that its Industry Standard Servers division had sales of $3.45 billion, up 10 percent from the year-ago period and up 21 percent sequentially from the third fiscal quarter. Hyperscale servers, which include the SL6500 and SL4500 series of minimalist servers as well as the newer Moonshot systems, had double-digit growth in the quarter, according to CFO Cathie Lesjak. This growth was driven in large part by one big deal that HP closed in the quarter. With the stabilization of its BladeSystem blade server sales and the uptick in hyperscale sales, HP expects to gain about a point of market share from its rivals. The company is also getting ready to add new server nodes to the Moonshot machine within the next few weeks, and hopes this broadens the appeal of the product.

On a conference call with Wall Street analysts going over the numbers, CEO Meg Whitman was clearly pleased that the overall Enterprise Group, which includes servers, storage, switching, systems software, and related tech support services, had its first revenue growth in eight quarters. But Whitman added that the revenue uptick in servers was not all good news. An "unfavorable mix" of server sales and ongoing competitive pricing pressures pushed down the operating profits for HP's systems. Across all of Enterprise Group, sales hit $7.59 billion in the quarter, up 1.8 percent, but operating profits fell 10.3 percent to $1.1 billion. Whitman said that HP had strengthened its go-to-market strategy, had done better market segmentation, and worked better with its channel to boost server sales, but that it needed to do a better job managing margins. The idea now is to do bundles of servers and other HP products to get a better blended margin.

This, of course, is exactly what IBM and Oracle do. But those companies have a much larger portfolio of systems software with which it can do bundles. IBM could, for instance, give its mainframes away and still make money on the mainframe systems software. As it turns out, it makes money on mainframe hardware and then it makes a lot of money on mainframe operating systems, databases, middleware, and such.

The Business Critical Systems division at HP, which includes HP-UX, OpenVMS, and NonStop systems, was for many years the closest analog that HP had for a mainframe business. But the decline of Unix, which was accelerated by its legal battles with Oracle over the fate of the Itanium processor, has rapidly shrunk that BCS business. In the final quarter of fiscal 2013, the BCS division brought in a mere $334 million, down 17 percent from the year-ago period but up 18 percent sequentially. These revenues are mostly driven by Itanium-based Integrity and Superdome 2 systems at this point, and mostly by HP-UX.

The future "Project Odyssey" Xeon E7-based NUMA systems that are under development by HP, running Windows Server and Linux but not HP-UX, will be considered BCS machines, not ISS machines. Ditto for the future Xeon-based NonStop fault tolerant clusters, which HP said earlier this month that it had under development.

On the storage front, HP's revenues rose 1 percent to $952 million. As has been the case for the past several quarters, the old storage is on the downslide and the new storage, such as its 3PAR arrays, are on the upswing. Whitman said on the call that the 3PAR arrays posted a record quarter, and that the converged storage products, which includes 3PAR and other more modern arrays, had 47 percent revenue growth to $407 million. Older, traditional arrays stomached a 19 percent decline to $545 million.

Rounding out the systems part of HP's business, the Networking division had sales of $656 million, up 3 percent. Whitman said that networking revenues were strong in China and that the company had good growth in Europe, the Middle East, and Africa, but that sales were down in the Americas.

Across all of HP, revenues came to $29.13 billion, down 2.8 percent from a year ago, with a profit of $1.92 billion, which was a lot better than the $6.49 billion loss it posted four quarters ago after writing down the acquisition of Autonomy, one of the key components in the HP software portfolio.

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