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HP Q3 shows G6 rise, Integrity fall

G6-Blade HP released its third quarter '09 results this afternoon, numbers that showed ProLiant G6 server revenues on the rise while Integrity-based system sales dropped for the third straight quarter. The Intel Xeon-based G6 units like the blade at left operate with Windows and Linux environments, while the HP-UX alternative to the HP 3000 can call upon only Integrity servers.

The quarterly report shows HP managed to beat earnings estimates for the period. However, it took soaring revenues and profits out of the EDS operations to offset steep drops in most other HP sectors, including the Business Critical Servers group that sells Integrity and HP-UX. BCS revenue declined 30 percent from Q3 of 2008, results from a much stronger fiscal year. But not even blade revenues could lift BCS. Blade sales were down 14 percent from last year's quarter. Integrity sales were off by 34 percent versus last year's Q3.

HP CFO Cathie Lesjak said that the G6 ProLiants, just rolled out in April, have performed well in the server sector. These Industry Standard Servers which run Windows and Linux were the only bright spot on a tough enterprise storage and server picture.

"While each of the businesses within ESS was down compared with the prior year sequentially, ISS grew 14 percent as a result of strong customer demand for our newly launched G6 platform," Lesjak said.

In contrast, BCS sales slipped to $578 million for the period, compared to $2.2 billion of the Intel Xeon server revenues. While HP is now selling $4 of ProLiants for every dollar of Integrity, the profitability from the more advanced Integrity revenues is what's keeping Integrity in HP's futures. But the next month or so could tell the tale of how HP enterprise server business will fare in 2010, according to HP CEO Mark Hurd's prior report.

In Q2 of '09, Hurd told analysts that the August-September 2009 timeframe is where HP hopes enterprise computing customers come around and reverse the '09 trends. Hurd explained this enterprise sales stall as companies' mandates to slow down new projects.

I think the more important question is what are those planning sessions looking like in August and September of 2009 about 2010. I think CIOs have been giving marching orders that say "Take that  infrastructure; keep the infrastructure running. If you have to replace things to keep things running, replace it. New projects -- be very particular about new projects you start. And if you can avoid starting that project, avoid starting it." We have customers that tell me, "We're just delaying as long as we can until we have to buy."

Hurd and HP are hoping that an uptick in the economy during this current quarter will pull some FY2010 sales into HP's Q4. Hurd said in a statement that "Business is stabilizing, and we are confident that HP will be an early beneficiary of an economic turnaround and will continue to outperform when conditions improve." Hurd predicted that 2010 will be a better year than 2009, but he doesn't see evidence yet of a turnaround. "We're encouraged I think by the stability that we're beginning to see in the market, but not yet at a point that we're ready to call it a turn," he said.

With the economy not yet rebounding, HP might be cautious about removing any business segment that's been sliding as consistently as the Business Critical Servers. But the HP 3000 was eliminated from HP's plans in 2001 because of its declining growth, albeit in a much different time in Hewlett-Packard history.

While HP's hardware businesses struggled -- even printer sales were down -- services including the EDS unit have become the new engine of the Hewlett-Packard economy. Lesjak summarized the services windfall.

"Drilling into the services business," she said in an analyst conference call, "Q3 revenue was $3.9 billion in IT outsourcing, $2.4 billion in technology services, $1.4 billion in application services, and $711 million in Business Process Outsourcing." Services made up 31 percent of quarterly sales, the largest segment.

But even some service operations are being scrutinized. In the hours before the Q3 call, rumors were afoot that had HP considering a sale of its BPO business. Reuters reported that unidentified sources say BPO, "which provides back-office support to clients, [is] a low-margin business that is not central to [HP] growth plans." Much of BPO is operated out of India.

Overall, the HP Q3 numbers showed only a 2 percent revenue drop over last year's Q3, a report that demonstrates just how much lift the EDS business has provided in a year with steep server declines. PCs also experienced a sales fall-off. The company posted $1.6 billion in total Q3 earnings, $1.3 billion of which came out of its Services group. HP paid $13 billion for EDS last fall, and it reported that 16,000 layoffs out of the 24,600 forecast have already taken place. HP said these "removals" improved its cost structure, one contributor to the HP earnings.