HP starts 2012 with a sinking quarter
February 23, 2012
Hewlett-Packard reported falling results in most of its computer areas yesterday, even though the company beat the estimates of analysts. Not even those modest suprises could prevent the markets from beating HP stock back into the $27 range after the Q1 2012 quarterly report. It's possible that the markets were looking at the darkest news out of HP's sales: the business that it's stopped winning in enterprise computing.
If HP's escaped your IT orbit, then the trevails of the Business Critical Systems (BCS) unit -- where the news is darkest -- won't matter at all. Except maybe to confirm that HP's an IT partner which belongs in your rear-view mirror. But if your migration plans include HP's more favored platforms like Unix, Linux or even Windows, the Q1 notes are worth considering. (Click on the above chart for more detail.) This doesn't seem to be a "everybody in the market is down" kind of report. Q1 is the second straight period where HP had to talk about sales sinking in nearly all of its businesses.
Just to recap, BCS is the unit where HP's Itanium servers and software products are sold. Just not so much anymore. BCS is a part of the Enterprise Servers, Storage and Networking unit (ESSN). The bigger brother of BCS is Industry Standard Servers. Whether Proprietary like Itanium, or Standard like Xeon/x86, none of this stuff at HP is selling like it did just one year ago. Below is the summary straight from HP.
ESSN revenue declined 10 percent year over year, with an 11.2 percent operating margin. Networking revenue was flat, Industry Standard Servers revenue was down 11 percent, Business Critical Systems revenue was down 27 percent, and Storage revenue was down 6 percent year over year.
What is selling as well as it did in ESSN? Networking. Outside this enterprise group, software revenues were up, since HP added the sales of Autonomy, its $10.2 billion acquisition. Services stayed even. Oh, and HP Finance posted gains, too. At least the debt business is on the upswing. It all flows down to a bottom line that took a 44 percent hit in profits in Q1. New CEO Meg Whitman isn't happy, kind of an odd response to results at an HP where she's been a director for more than a year. And for the first time, HP described its regular dividend in terms of what it costs the vendor in cash: $244 million to pay out for Q1. Apple's never paid a dividend. Now it looks like HP's legendary dividend might be rising beyond its new economic realities.
It is possible to have a wide range of enterprise choices, both in software and servers. IBM does it, including the Series i systems you know as the AS/400. If you're wondering whether the AS/400 is still relevant, have a look at the retail screens at Costco the next time you're shopping for paper towels or party quiches. Yup, the screens are running the "Series i" at one of the best-performing retailers in the US.
The rest of the picture at HP included some finger-pointing at the economic miasma and cheery resolve to fix things up in the business strategy. Those hard-to-get disk drives hurt the company too, Whitman said. But the PC problems with suppliers are not the most essential woes to address, she explained.
HP's got to fix execution, she said. In PCs at least, it'll be cutting unnecessary models to make developing, selling and supporting products less complex. Whitman referred to "ongoing problems" with each of its business units. She wants to be investing in technology for the future and streamline processes and support services.
That's going to be hard to do while HP tries to keep its profits from disappearing. A 44 percent dive in a single quarter follows the 92 percent pratfall of Q4 in 2011. Whitman talked about "saving to invest," since the company's credit ratings have eroded and its debt is approaching some very interesting levels. How do you save to invest when your sales are dropping? You cut costs, we suppose. Whitman might be faced with the same plan that ousted ladies-man CEO Mark Hurd tried. And failed at, if you ask Whitman, since he spent five years dumping R&D investments to keep share prices and profits healthy.
A healthy vendor is essential to a secure and safe IT future. If a migrating company is keeping company with HP, these company quarterly results do add up.