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Rocky HP Q3 triggers replacement reorg

Hewlett-Packard has announced another skid in its fortunes for the servers designed to replace HP 3000s. This time around, the results were so disappointing that the Enterprise business unit had its Executive VP removed from the job.

Enterprise Group Q3 2013 slide


It's not that the numbers for this period were out of line with the last eight quarters. (Details above) But the malaise of the sales at Business Critical Systems -- where the Integrity servers have been losing revenue and profit -- has spread to the sales of the ProLiant systems as well. BCS, which still gets its own baggage to carry in the HP quarterly reports, dropped another 26 percent of sales versus 2012's Q3.

How small has BCS become? It's a question which can be answered at last. HP reported that sales of the Integrity systems' unit represented 4 percent of the total $6.8 billion of the Enterprise group. That's $272 million in sales of HP-UX, NonStop, and OpenVMS servers and related peripherals for a 3-month period. Less than 1 percent of HP's sales, or a run rate of just over $1 billion a year. Except that it's been running downhill since 2011, and Dave Donatelli was all but fired for the results.

HP's CEO Meg Whitman reported that Donatelli -- who came to HP in a contested job change from EMC -- will be "on special assignment," instead of running the futures and fortunes of HP's Enterprise servers. The group includes Industry Standard Xeon-based ProLiants. The whole unit dropped another $600 million in sales during Q3. Like so many of the dropping units on the HP report, the group was listed as working in a "tough compare" to the 2012 business. 

Which would make for a good explanation, until you remember HP reported a record loss for last year's Q3. Analysts said after the call that the HP results show, as Mad Money's Jim Cramer brayed, "HP needs three things: new product, worldwide growth and a lot of luck."

The only part of the HP third quarter that didn't slip was the Software group. No growth, but no decline in sales, either. All of the declining -- from the steep 26 percent at BCS, to the smallest of 4 percent in Printing --was against the Q3 of 2012. While sales were off by 8 percent company-wide, HP reported a total of $1.7 billion in profits overall after it took its writedowns and amortizations. The Enterprise Group, home to HP Servers, still contributed $1 billion to that total profit. The Enterprise profits dropped 20 percent in real dollars from last year, however.

The company has been maintaining its overall profitability by shaving down costs. Whitman, like her predecessor Mark Hurd, calls this becoming more efficient. The solutions in the business servers unit will run to things like investment in the support of the sales force and operations. Or getting better organized in marketing and product management. Growth is supposed to come from leveraging accounts between Enterprise Services -- another slipping unit -- and Enterprise Servers group.

The slipping results didn't shake out to the bottom line of profits because of those cost savings. HP eliminated another 3,800 jobs in the period. That's a small percentage of the 22,000 it's shaved away for the last 18 months. HP still employs about 300,000 people worldwide.

The actual numbers came out early on August 22, eight hours before the explanations from Whitman and CFO Cathie Lesjak. All day the stock got sold down, losing 14 percent of its value and driving down the Dow by five points all by itself. There was no bounceback during the trading day that followed, which is unusual. A Dow Jones company that takes a swoon like this often gets bought up in the aftermath at the lower prices. HPQ shares recovered just 18 cents.

That might be due to the adjustment of analyst expectations. While HP might have avoided a nose-dive by beating profit estimates, it's become "The Incredible Shrinking Company" (Seeking Alpha) or "headed for an abyss" (ValueWalk). At MarketWatch, John Shinal wrote, "Far from engineering a turnaround, Whitman is overseeing what looks more and more like a voyage to the bottom of the sea." One analyst house shifted its advice from "hold" to "sell" after the report's numbers came out. 

Customers care about more the numbers in pricing, however. The forecasts of recovery are often left to business journalists, analysts, and fund managers to fret over. At the Motley Fool, author Anders Bylund noted that "HP never resorted to the ultimate panic strategy of deep discounts in the hunt for revenue targets. Product prices remained firm." That means that despite the loss of business, HP didn't lower pricing for customers and prospects. The stock has "just about matched the Dow's one-year returns." HP's got the advantage of rebounding off an $11.65 nadir last fall. Anything in the $20s seems better.

Q3 infographicHowever, a computer supplier needs to be on a mission to do more than protect its share price and return cash to investors. HP's biggest number on its own infographic touted $283 million returned to shareholders. That counts share buybacks as well as dividends. The fine print for Q3: HP curtailed its share buyback program for "material, non-public information that prevented us from [repurchasing stock]." Nobody asked what that meant during a one-hour analyst call, so it must not be important to financial experts.

The fine print on the infographic was reserved for the percentage in lost sales.

Whitman said more than once that she's satisfied with the progress of what she calls a five-year turnaround project. "We have re-ignited innovation at HP," she said. Then she allowed that more acquisitions, which Whitman halted at first, would have to help spark new products. "We’re very focused, but acquisitions are going to have to be a part of this turnaround," she told analysts in her call. (You can listen for yourself at HP's investor website. Full numbers are at the main page of that site, too.) 

Later on, Whitman said that "HP is the product of many acquisitions," going back to the Compaq purchase that triggered the HP 3000 pullout. She added that not all of the acquisitions have been integrated fully.

"We have more work to do," she said. While noting that HP's in a happy place for cash: paying off a $1.2 billion note, buying stock, paying dividends -- Whitman said that an overall increase in sales for 2013 wouldn't be happening. Pockets of the company will see sales increases.

Which pockets increase might have an effect on the fortunes of futures for some products. Whitman said HP's got three segments of businesses, and its "heavily weighted now toward declining businesses."