HP quarter beats analyst estimates, but Integrity solutions' profit, sales slide again
November 27, 2013
HP has managed to eke out a penny more than business analysts estimated for its 2013 fourth quarter earnings. These days such a "beat," as the analysts call it, is essential to avoiding a selloff after a report like yesterday's. But the positive news did not extend to the business group which builds and engineers the Unix Integrity servers -- a significant share of the migrated HP 3000 installed base.
More than once during the one-hour report to financial analysts, HP CEO Meg Whitman and her CFO Cathie Lesjak talked about Unix like it's a market whose growth days have been eclipsed by steady erosion of sales and profits. "We have more opportunity to improve our profitability," Whitman said about a quarter where the overall GAAP earnings were 83 cents a share. That's $1.82 billion of profit on sales of $29.1 billion in sales. Revenues declined 1 percent against last year's Q4.
But R&D, so essential to improving the value of using HP-created environments like HP-UX, has seen its days of growth come to halt, and then decline at the Business Critical Systems unit. Lesjak said the company's year-over-year decline in R&D was a result of "rationalization in Business Critical Systems." In particular, the company's Unix products and business can't justify R&D of prior quarters and fiscal years.
As you look at the year-over-year declines in R&D, that was really driven by two primary things. One is the rationalization of R&D, specifically in the Enterprise Group's Business Critical Systems -- so we really align the R&D investment in that space with the long-term business realities of the Unix market. We did get some of what we call R&D value-added tax subsidy credits that came through. Those basically offset some of the R&D expense.
Business Critical Systems revenue declined 17 percent in the quarter to $334 million, due to "a declining Unix market." On the current run rate, BCS represents 1 percent of HP sales. And BCS sales have been dropping between 15 and 30 percent for every quarter for more than six quarters. HP posted an increase in its enterprise systems business overall, mostly on increased sales of the Linux and Windows systems in its Industry Standard Servers unit.
HP said it expects "continued traction in converged storage, networking, and converged infrastructure," for its enterprise business. But somehow, as the entire Unix market shrinks, HP said it's maintaining market share in that space. R&D at BCS will not be part of HP's planned growth for research and development in 2014, though.
She explained that R&D is down "due to streamlined operations across the Enterprise Group and lower R&D expenses, specifically within BCS." Long term, we remain focused on investing in innovation across the organization, and in fact, we've added headcount in engineering in FY13." In 2011 HP announced an initiative to add Unix features to its Linux environments in the biggest R&D project driven by Martin Fink, then-GM of BCS.
"We saw improved sales in our mainstream server business, but we need to improve our pricing discipline and profitability," Lesjak said. "Although revenue continued to decline in Business Critical Systems, we expect to hold or gain share in calendar Q3. And we have announced plans to bring a 100 percent fault-tolerant HP NonStop platform to the x86 architecture."
HP-UX and OpenVMS have no such plans. BCS revenues, including NonStop operations, dropped 26 percent from 2012 to 2013. This even includes an accounting for last year's deadly Q4, when HP had to report a $6 billion loss overall.
HP finished 2013 with $112 billion in sales, down five percent, and $6.5 billion in profits before taxes. The company restructured its way to about 13,000 fewer jobs during the fiscal year. Almost 25,000 people have exited HP since the program began in 2011.
Two organizational repositions were mentioned during the briefing. Robert Mao, chairman of a new China Region for HP's business, reports directly to Whitman. She also noted that Fink, who was named head of HP Labs last year -- a post that once was a full-time job -- has now added duties of leading the HP Cloud business as its General Manager. HP Cloud competes with Amazon Web Services among others. Whitman said Fink "will significantly accelerate our cloud business."
"Martin is a true technology visionary who brings tremendous understanding of the enterprise hardware and software space, extensive experience in platform development," Whitman said, "and he literally wrote the book on Open Source."
Whitman was referring to a 2002 book of Fink's, The Business and Economics of Linux and Open Source. The book which is out of print got a glowing back-cover blurb from Tim O'Reilly. But the publisher of textbooks Prentice Hall now touts bestsellers such as How to Succeed with Women and the How to Say It series.
The strategy in Fink's book came from an era when one positive review said, "Linux and Open Source is not 'just' for geeks any more." Linux -- and not the HP-UX and VMS markets where Fink managed before his Labs post -- is what's driving the modest growth in HP server business.