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HP profits up 28% on freshened servers

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The IT and investor communities were both a little jumpy this week, worried that IT bellwether Hewlett-Packard wasn't pulling in enough dough. But this was just borrowing trouble. Overall revenues at the HP were up 12.7 per cent to $30.8bn in the second quarter ended in April, and with HP keeping tight reins on costs, net earnings grew by 27.8 per cent, to $2.2bn.

Admittedly, HP numbers compare so well with a year ago, because a year ago, the economy in full melt. Plus, it has benefited from the acquisition of services giant EDS and networking player 3Com. But there is real growth in there, and given that HP spans all the major IT markets (excepting its relatively weak software business), the IT community will no doubt take HP's financials as yet another indication that the global economy is stabilizing.

Server sales tend to be a leading indicator as well as a lagging indicator on the economy - servers are one of the first things companies cut spending on when times get tough and one of the last big items they start spending on when things get better - and in Q2, the economy must have already mended some because HP said its Industry Standard Server division, which peddles x64-based ProLiant servers and BladeSystem blade servers, had a 53.6 per cent explosion in sales, to just over $3bn in the quarter.

That more than makes up for the hole created by the economic meltdown. In last year's fiscal Q2, sales had dropped 29.5 per cent to just under $2bn from $2.82bn in 2008's second quarter.

Cathy Lesjak, HP's chief financial officer, said that HP's VirtualConnect virtualized networking for its BladeSystem blades more than doubled its sales, and blade server revenues (across both x64 and Itanium blades) rose by 45 per cent in the quarter.

Everyone has been wondering if there is pent-up demand for x64 servers. Based on IBM's x64 server sales - up 36 per cent in its first quarter ended in March - and these numbers from HP, it sure looks like an upgrade cycle is under way.

Not all of HP's server lines are seeing the bump, of course. Thanks to Intel's delays in getting the quad-core "Tukwila" Itanium 9300 processors to market, HP's Itanium-based Integrity line is more or less stalled, with only customers who are desperate for processing capacity on their HP-UX, OpenVMS, or NonStop platforms buying today doing so - and no doubt at heavily discounted prices if they can keep their desperation secret.

HP's Business Critical Systems group saw a 17.2 per cent decline in Q2, to $538m. Two years ago, this Integrity business was being criticized for only bringing in $919m in revenues. That looks pretty juicy about right now.

To a lesser degree, HP's storage biz is on the mend, with sales up 15.9 per cent to $948m in Q2, but still lower than the $1.04bn in sales the company had in the quarter two years ago, before the Great Recession took hold thanks to real estate and banking meltdowns. HP said that its midrange EVA disk arrays only saw a 3 per cent growth rate.

Despite all this, Enterprise Storage and Systems group contributed something closer to its fair share to the HP revenue and profit pies, with $4.54bn in sales (up 31.4 percent) and the group contributing $571m in operating profits, up by a factor of 2.3 compared to the year-ago quarter.

The easy compares for HP's services business are over now that it has owned EDS for more than a year, and sales were only up 2.5 per cent to $8.71bn. Within HP Services, infrastructure technology outsourcing rose by 6.3 per cent, to just under $4bn, while technology services revenues were flat at $2.42bn, application services were down 1.9 per cent to $1.51bn, and business process outsourcing services were flat at $716m.

Operating profits were $1.4bn for the combined services units, up 17 per cent from the year-ago quarter. So, true to his word, Mark Hurd, HP's president, chief operating officer, and chairman has worked to extract costs from the EDS services biz. And, looking ahead, Hurd expects the services unit will improve.

"We expect to see a very good year for signings," Hurd said in a conference call with Wall Street analysts, adding that he expected the aggregate HP services biz to grow at or above the services market overall and for the company's backlog to grow at a similar pace.

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