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HP Q4 results show business servers stalled

Hewlett-Packard reported its fiscal year and fourth quarter results late Monday, results that drew good news from services business, PC and printer sales, and little else. While the headline news showed an increase in Q4 profits over the same 2008 quarter, HP achieved its rise on cost cutting. Its total sales dropped 8 percent versus the prior fourth quarter and 3 percent for all of fiscal 2009.

That's a $114 billion year in sales, with HP reporting a total profit of $10.1 billion. The 2008 numbers hold the records for both categories -- and that was a fiscal year where EDS didn't contribute for two of HP's four quarters. Enterprise Server sales, part of the ESS group in the chart below, were off during 2009 by about $4 billion.

ESS Q4 The numbers were brightest in the services sector which contributed most to 2009 sales. Once HP added EDS to its portfolio of acquired companies, the unit delivered both profits and sales that rose throughout the year. Services has kicked in upwards of $1 billion per quarter in 2009 profits, becoming the new printer group of HP's financial desires. The EDS unit came close to topping HP's PC business in sales, all while earning three times as much profit. Services now represent almost 38 percent of all HP profits.

PCs sat at the center of analyst questions in the briefing held after the US markets closed. HP is taking market share from Dell, but sales revolve around the least expensive products in the Personal Systems Group lineup. Wall Street and investment experts didn't ask about the Enterprise Storage and Server unit or the group's Business Critical Servers division. ESS generated more profits than in Q3, but its $481 million in earnings was 30 percent below the same 2008 quarter.

The latest numbers for the BCS products, such as the Integrity HP-UX server line and the ProLiant Windows servers, wouldn't inspire confidence in prospects for a renewal of former's sales growth.

The HP-specific enterprise servers which make up the Integrity line saw a drop in year over year sales of 33 percent. Even the arrival of blade server options couldn't show a rise, with sales off 8 percent.

The results in enterprise servers looked like a situation where the small businesses led HP to better profitability while the HP-UX options for midrange and large companies brought up the rear. HP's CFO Cathy Lesjak had to point to incremental growth to assert improving conditions for the company's server operations. Increasing sales volumes for Industry Standard Servers (ISS) that run Windows drove up operating margins for ESS, she said.

"Although each business unit in Business Critical Systems was down year on year, each grew sequentially," Lesjak said. "Business Critical Systems and Storage improved 6 and 11 percent, respectively." Sequential comparisons are used to show overall sales trends, but business booked during a Q3 does not compare well with sales opportunities much deeper into customers' calendar year.

The newest G6 platforms in ISS, delivered during the summer, contributed to those Windows servers' 15 percent sales rise between a quarter ending July 31 and the one ended October 31. HP pre-announced these servers in the middle of Q3, tamping down demand for existing server sales that would then rebound when the new servers became available.

"With its compelling value proposition, we are seeing rapid adoption of this [G6 ProLiant] platform, with approximately 50 percent of ISS sales now coming from G6," Lesjak said.

HP made forecasts for its 2010 business, at least in the near term. It expects a quarter to start fiscal 2010 of about the same sales as the just ended quarter. Earnings will drop sequentially, HP predicts, while the full fiscal year should show sales of about $118 billion.