May 22, 2014
HP's migration servers stand ground in Q2
The decline of HP's 3000 replacement products has halted
(click on graphic for details)
CEO Meg Whitman's 10th quarterly report today promised "HP's turnaround remains on track." So long as that turnaround simply must maintain sales levels, she's talking truth to investors. During a one-hour conference call, the vendor reported that its company-wide earnings before taxes had actually climbed by $240 million versus last year's second quarter. The Q2 2014 numbers also show that the quarter-to-quarter bleeding of the Business Critical Systems products has stopped.
But despite that numerical proof, Whitman and HP have already categorized BCS, home of the Linux and HP-UX replacement systems for 3000, as a shrinking business. The $230 million in Q2 sales from BCS represent "an expected decline." And with that, the CEO added that Hewlett-Packard believes its strategy for enterprise servers "has put this business on the right path."
The increased overall earnings for the quarter can be traced to a robust period for HP printers and PCs. Enterprise businesses -- the support and systems groups that engage with current or former 3000 users -- saw profits drop by more than 10 percent. HP BCS sales also fell, by 14 percent versus last year's Q2. But for the first time in years, the numbers hadn't dropped below the previous quarter's report.
The decline of enterprise server profits and sales isn't a new aspect of the HP picture. But the vendor also announced an new round of an extra 10,000-15,000 job eliminations. "We have to make HP a more nimble company," Whitman said. CFO Cathie Lesjack added that competing requires "lean organizations with a focus on strong performance management." The company started cutting jobs in 2012, and what it calls restructuring will eliminate up to 50,000 jobs before it's over in 2015.
Enterprise business remains at the heart of Hewlett-Packard's plans. It's true enough that the vendor noted the Enterprise Systems Group "revenue was lower than expected" even before the announcement of $27.3 billion overall Q2 revenues. The ESG disappointments appeared to be used to explain stalled HP sales growth.
But those stalled results are remarkable when considered against what Whitman inherited more than two years ago. Within a year, HP bottomed out its stock price at under $12 a share. It was fighting with an acquired Autonomy about how much the purchased company was worth, and was shucking off a purchase of Palm that would have put the vendor into the mobile systems derby.
If nothing else, Whitman's tenure as CEO -- now already half as long as Mark Hurd's -- contains none of the hubris and allegations of the Hurd mentality. After 32 months on the job, Whitman has faced what analysts are starting to call the glass cliff -- a desperate job leading a company working its way back from the brink, offered to a woman.As the conference call opened on May 22, HP's stock was trading at close to three times its value during that darkest month of November, 2012. At $31 a share valuation, HPQ is still paying a dividend to shareholders. Meanwhile, the company said it has "a bias toward share repurchases" planned for the quarters to come.
There's still plenty of profit at HP. But the profits for the Enterprise Group, which includes blades and everything that runs an alternative to MPE, have been on a steady decline. A year ago before taxes they were $1.07 billion, last quarter they were $1 billion, and this quarter they're $961 million. Sales are tracking on the same trajectory.
Whitman noted the tough marketplace for selling its business servers in the current market. She also expressed faith in HP's system offerings. It's just that the vendor will have to offer them with fewer employees.
"I really like our product lineup. But we need to run this company more efficiently," she said. "We're going to have to be quicker and faster to compete in this new world order."
When an analyst asked Whitman about morale in the face of job cuts, she said people at HP understand the economic climate.
"No company likes to decrease the workforce," she said. "Our employees live with it every single day. Everyone understands the turnaround we're in, everyone understands the market realities. I don't think anyone likes this." HP believes the extra job cuts will free up an additional $1 billion a year, "and some of that will be reinvested back into the business."
There's also money being spent in R&D. At first during the Q&A session, the CFO Lesjack said that "the increase of R&D year over year is very broad-based" across many product lines. Whitman immediately added that there have been increases for R&D in HP's server lines. The servers which HP is able to sell are "mission-critical x86" systems. That's represents another report that the Integrity-based lineup continues to decline. BCS overall represents just 3 percent of all Enterprise Systems sales in this quarter.
HP's internal enterprise systems -- which were once managed by HP 3000s -- are in the process of a new round of replacements. SAP replaced internal systems at HP last decade. Whitman said the churn that started in 2001 with the Compaq purchase has put the vendor through significant changes, ones that HP must manage better.
"This company has been through a lot," Whitman said during analyst questioning. "The acquisition of Compaq. The acquisition of EDS. Eleven to 20 software acquisitions. It's a lot of change. We're putting in new ERP programs and technology to automate processes that frankly, have not been done in awhile."
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