August 21, 2015
HP's Q3: Tumbling toward a split-up is dicey
The only unit in HP that showed revenue growth, Enterprise, did so on the strength of better networking gear sales and improvements in the ProLiant business.
Hewlett-Packard presented its next-to-last quarterly report to analysts and large customers yesterday. The former are paid to benchmark HP's progress towards being a healthier company after a split-up Oct. 31. The latter group will be paying for the cost to create an Enterprise-laden HP. At the moment, it's looking like they won't be paying out as much as HP would like.
One analyst's summary of the figures for the period: "Is Hewlett-Packard Ready To Separate With These Earnings?" That smacks of clickbait talk, but the results didn't show an HP that's keeping up with its goals for improving sales and profits. All but one HP operating unit reported lower earnings and sales for Q3. The group that improved on Q3 of 2014 might surprise you. It's the Enterprise Group, by a whole 2 percent. The rest of HP's units took a dip in their sales in Q3.
Yes, that's Enterprise, where the remaining HP enterprise servers and platforms do business. This is the unit that's cut short the VMS futures, shut down the HP 3000 almost five years ago, does declining business for HP-UX servers. What gave Enterprise a 2 percent lift from 2014 sales was its networking business. You can sell networking gear into any environment, your own or another vendor's. Networking even gets a lift from the cloud revolution, but we'll get to that in a moment.
The Business Critical Systems unit always comes in for special focus here at the NewsWire. The group that once housed 3000 operations, as well as currently serves up the 3000 alternatives which are not Windows, posted another quarter with a decline in sales. The dollars toted up to 21 percent less than the previous Q3. That 2014 Q3 was down 18 percent from 2013's, and the 2013 Q3 was down 26 percent. Even accounting for currency and percent-of-percent figures, BCS is half the size it was in 2012.
By a rough estimate, the total of all sales for HP critical enterprise systems is now under $1 billion yearly. The good news is that the $1 billion will be twice as big a slice, once HP separates Enterprise from HP Inc.To the specific numbers we go, as they like to say on NPR's Marketplace.
Enterprise Group sales were $7 billion in Q3, and BCS made up 3 percent of that, or about $210 million. The complete HP sold $25.3 billion in software, services, and products, off 8 percent from the Q3 of 2014. Enterprise Group profits made up 45 percent of HP's overall profits, however. Only the Software group's sales are more profitable than Enterprise revenues by percentage, and Enterprise was $725 million ahead of Software in raw profits.
Why care about profits? HP will need them to succeed in paying for its split-up, and the tumbling trends have some analysts concerned. Hewlett-Packard is profitable overall, and for once, its Enterprise operations — the business that includes ProLiant servers as well as Integrity systems — led the way in earnings. That's in part because the legendary Printing unit took a tumble. Printing's falling fortunes not going to be a problem for Hewlett-Packard Enterprise in about 10 weeks' time.
Some analysts and wags have said that the spin-off company being created, HP Inc., is called that because printer ink will drive its heartbeat. The company has come a long way since being an entity that included Agilent instrumentation sales. The HP of 1995 needed nine months to sell as much as the HP of this year sells in a single quarter.
But during that year of 1995, HP took the chief of its PC and Printer business and gave him control of HP's enterprise server units, including the 3000's group. Rick Bulluzzo brought principles that fit consumer reselling to bear on enterprise business. The two businesses couldn't be more different, or at least were unlike one another in 1995. It's something like expecting a fleet of Uber drivers to be able to deliver a year's worth of ball bearings for General Motors. GM would've been looking for different bearings.
What's injured HP's enterprise business growth more than anything has been the rise of cloud computing. HP hopes to replace its lost enterprise server revenues with its Helion Cloud solutions. But while it forgoes the sale of bigger servers to existing customers, as well as the Services it sells to manage such products, the company's got to score against competitors like Microsoft's Azure stack or Amazon Web Services cloud products. It's been looking to make up sales with its own larger customers, and even at that, it expects to win easiest with the companies that are already deploying a virtualized solution.
"Where we win are with enterprises that have stepped all the way through the virtualization steps in the past three to four years," HP Cloud VP Bill Hilf told Network World last fall, "the companies that have more than 50 percent of their environment virtualized. Now they’re getting a lot of pressure on being able to go faster." HP Enterprise aims to capitalize on that pressure, even as it's grappling with pressure to grow on its own.
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