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PCs punch HP in the gut, servers knee it in the jewels

Oh, if only we'd used Autonomy software on its own books

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It has been a long time since Hewlett-Packard has had a happy quarter, and it looks like it is going to have to wait quite a while to have one again if its final quarter of fiscal 2012 is any indication.

In the quarter ended on October 31, it was mostly tricks, not treats, with revenues off 6.7 per cent to $29.96bn and after taking a whopping $8.8bn against its acquisition of Autonomy, the company reported a net loss of $6.85bn compared to a tiny $239m profit in the year-ago period.

On a non-GAAP basis, ignoring the impairment of goodwill relating to the Autonomy acquisition, $372m in other amortization of purchased assets, and $378m in restructuring charges, HP's net income was $2.28bn - down 2.9 per cent. CEO Meg Whitman said in a conference call with Wall Street analysts on Tuesday morning this proved "that the actions that HP is taking are working" in an effort to turn the company around.

HP had a tough fourth quarter on most fronts, with its software unit ironically posting good gains as other parts of the business all saw declines due to the macroeconomic environment and tough competition.

It was no surprise at all, in the wake of rival Dell's financials last week, that HP's PC business would be off with a world price war in notebooks raging. HP's Personal Systems group stomached a 14 per cent revenue decline, to $8.71bn, and operating profits plummeted by 46.5 per cent to $309m across all PC products. Notebook sales dropped 15 per cent to $4.57bn with units off 12 per cent, while desktop PC sales were $3.37bn, falling by the same amount for revenue and shipments. Workstations, normally a bright spot for PSG, declined 7 per cent to $550m in revenues.

Printing products, which were rolled up into a single Printing and Personal Systems Group earlier this year but which are still discussed separately, had $6.08bn in sales, down 5.3 per cent. The good news here is that HP's renewed focus on high-end printers and a shift in the way it packages and sells consumables helped push the operating margins for the printing group up 34.6 per cent to $1.07bn. The bad news is, add PCs and printers together and operating margins were nearly dead flat compared to Q4 of fiscal 2011 at $1.38bn. Supplies revenues were off only 1 per cent to just over $4bn, and printing hardware dropped 12.8 per cent to $2.07bn. Revenues for the Enterprise Servers, Storage, and Networking group fell 8.6 per cent to $5.12bn and operating profits dove 41 per cent to $423m. ESSN took its lumps in the quarter on a number of different fronts, according to Cathie Lesjak, HP's CFO.

First and foremost, the Itanium-based Integrity and Superdome 2 server lines in its Business Critical Systems division continued to feel the after-effects of the legal battle between HP and Oracle over the future of Itanium. Customers were also expecting Intel to debut the eight-core "Poulson" Itanium 9500 processor this year, and buying always slows ahead of a new processor launch regardless of architecture or vendor. Intel finally launched the Itanium 9500s two weeks ago and HP has revamped its Integrity and Superdome 2 lineup, offering customers up to three times the bang for the same bucks compared to the earlier generation of Itanium 9300 machines.

We'll see in the coming quarters if this, and Oracle's court-mandated support for its software on Itanium machines, can help the BCS unit rebound. But during this quarter, BCS took a 25 per cent revenue hit, falling to $401m.

Sales of x86 servers and storage didn't help out in fiscal Q4, either. The flagship ProLiant server line in its Industry Standard Servers division declined 7 per cent to $3.14bn, and Whitman said that HP faced both macroeconomic issues and price competition on the x86 server front and that the company expected this to continue on into the fiscal 2013 year. She said that x86 server sales in EMEA were particularly soft in the quarter.

Moreover, while HP's hyperscale SL server lineup saw double-digit revenue growth, this product line is putting pressure on commercial ProLiant and BladeSystem products.

The problem is this: the big hyperscale data centers don't need all the extra goodies in a server where HP makes its profits because resiliency is enabled across a cluster of machines, not maintained within a single box that is beefed up with RAID controllers, management controllers, and other redundant components. HP is trying to build a premium product with its CloudSystem blades, which are used to implement infrastructure clouds, but it is important to note that HP doesn't use these systems in its own cloud.

Within ESSN, HP's Networking division had a 7 per cent revenue bump to $635m, but storage fell 13 per cent to $946m, despite 3PAR array sales being up nearly 60 per cent.

HP Software, which includes various OpenView products as well as the Vertica distributed database and Autonomy unstructured data store products, was up 14 per cent to $1.17bn, and operating profits for this group rose by 12 per cent to $318m. If it were not for that whole Autonomy debacle, this business might be looking pretty good – and HP might have had some cash with which to make lots of other software acquisitions.

HP Services had a 6 per cent revenue decline to $8.71bn in the quarter, and posted an operating profit of $1.23bn, up a smidgen from a year ago. Outsourcing revenues fell 6 per cent to $3.66bn in fiscal Q4, while technology services (including break-fix and other maintenance) fell 4 per cent to $2.63bn. Application and business services, which includes application hosting and business process optimization, had a 7 per cent shrink to $2.43bn. HP Financial Services, which is kept separate from the larger services group and which provides leasing and financing to HP channel partners and end user customers, brought in $966m in revenues, up one point, and had $104m in operating profits, up 6.1 points. ®

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