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HP's server, PC, and printer businesses stumble

Is Whitman HP's long-awaited Lou Gerstner?

New HP CEO Meg Whitman sure does have her work cut out for her, but she managed to notch up a quarter that was slightly better than Wall Street expected on the revenue and profit fronts.

But don't call victory quite yet. HP took some significant hits in its core PC, server, and printer businesses in the past three months.

In the quarter ended October 31, HP's revenues were $32.12bn, down 3.5 per cent from the year-ago period. The company posted only $795m in earnings from operations, down a staggering 75.9 per cent, and had another $401m in interest costs. After paying taxes, net earnings were only $239m, down 90.6 per cent.

HP took a $2.1bn after-tax writedown related to the shuttering of its webOS device business in fiscal 2011, and $755m of that hit in their fourth fiscal quarter. The company also had another $179m in restructuring charges in the quarter, pushing down profits.

One could argue that these are not the kind of financial results that a company should have when it is blowing $10.3bn on a software company with a little more than $1bn in projected sales and a few hundred million in profits, as former HP CEO Léo Apotheker did back in August when the company bought Autonomy, a deal that new CEO Whitman followed through with six weeks ago.

But the way the Autonomy deal was structured, HP could not easily back out, and would no doubt have been sued by its shareholders had it tried to do so. Autonomy may turn out to be a great business for HP, but it was a very pricey acquisition, particularly given the timing.

HP ended the October quarter with $8.04bn in cash and $8.08bn in notes and short-term loans plus another $22.6bn in long-term debt, $10.3bn of which associated with financing in the HP Financial Services portfolio.

HP has bigger problems than an expensive acquisition. The PC business is slowing because consumers are jumpy and because HP's spinout drama from August spooked the market (HP has since said it will be keeping its PC biz). In addition, HP's commercial business has been slowing progressively through fiscal 2011, and there has been too much drama at the company since August 2010, when Mark Hurd, CEO before Apotheker, was shown the door.

"We just need to get our heads down and get out of the news cycle and cut down on the drama," Whitman said on a conference call with Wall Street analysts after the market closed. "We need to run this as one HP, so we can bring the full portfolio to bear to solve customer problems."

To that end, HP is no longer providing guidance on a segment basis or for the company as a whole – like rival IBM, HP is now only providing guidance on earnings per share. To that end, in the first quarter of fiscal 2012 ending in January, HP expects to bring 61 to 64 cents in earnings per share, and at least $3.20 for the full 2012.

For all of fiscal 2011, HP had sales of $127.25bn, up 1 per cent, and net earnings came to $7.1bn, down 19 per cent. Earnings came in at $3.32 per share.

Walking through the Q4 numbers

HP's Enterprise Servers, Storage, and Networking group had sales of $5.65bn, down 4 per cent, and Whitman said that the overall business was impacted by a very tough compare with the Industry Standard Server division having been up 32 per cent in the year-ago quarter. This time around, sales were off 4 per cent to $3.38bn.

"We're back to a normal refresh cycle," Whitman explained, and when she was asked if the fact that hyperscale companies such as Google, Facebook, and Amazon have been building their own servers had an impact on the ProLiant server business, Whitman replied that "that's not one of the worries I have in this business."

In fact, she said that HP was "pretty excited" about its "Redstone" ARM-based servers, which are dense-pack machines based on quad-core processors from Calxeda. "This has a chance to change the game, and that is what HP is supposed to be doing," Whitman declared.

How important it is to have an HP CEO that actually likes hardware..?

The Business Critical Systems division, which peddles ancient PA-RISC and Alpha machines as well as Itanium-based Integrity and Superdome machines that predominantly run HP-UX Unix, took it on the chin – again – with sales off 23 per cent in the quarter, to $535m.

Whitman didn't pull any punches about the BCS unit, and neither did HP's CFO, Cathie Lesjak, who said that HP is working to enforce contracts it believes it has with Oracle for continued support of that company's software on future version of its Itanium-based platforms.

Lesjak said that the BCS unit would "remain a headwind" for all of fiscal 2012, and Whitman was even more blunt. "The BCS business is a declining business," she said, adding that the important thing was to invest in technologies to service those customers. (She didn't say nor necessarily mean any particular technology.) "It's a slow decline, but it is declining."

HP's storage business was up 4 per cent to $1.09bn in the quarter, and triple-digit growth for 3PAR arrays more than made up for declines in MSA and EVA disk array sales. HP's switch and router business grew 5 per cent to $648m, and was another bright spot.

ESSN operating profits fell by 17.5 per cent to $733m. That damage was mostly caused by declining Itanium-based server sales, caused in large part by Oracle's dropping an iceberg in front of the Itanic chip back in March.

The PC and printer businesses had a tough time in fiscal Q4, as well.

Notebook sales declined by 4 per cent to $5.39bn, and miraculously, desktop sales were flat at $3.95bn. Workstation sales rose by 12 per cent to $593m, which just goes to show you what happens when some good 3D games come out. Consumer PC sales fell by 9 per cent, and commercial PC sales rose 5 per cent. The Personal Systems Group overall, including non-printer peripherals, had sales of $10.12bn, down only 2 per cent. Not the end of the world. PSG had $578m in earnings from operations, up a smidgen from a year ago believe it or not.

Over in the Imaging and Printing Group, HP pumped the channel full of printer supplies earlier this year in anticipation of continuing demand. But as the economies of the globe have gone south a bit, so has ink consumption. Printer supply sales were consequently off 14 per cent, to $4.04bn, in the quarter, and Lesjak said it would take a few quarters to get inventory back in line with production; HP is assuming, perhaps optimistically, that the economies will stabilize and grow and this ink consumption will resume.

Apparently, GDP growth and ink consumption track by geography around the globe, which stands to reason.

HP's consumer printer biz was down 8 per cent to $684m, while commercial printer product sales rose by 4 per cent to $1.6bn. Earnings from operations were down 34 per cent to $808m. HP's ink was not printing as much money in the quarter.

Thanks to one month of sales of Autonomy and the addition of Vertica, HP Software had a nice 28 per cent revenue bump to $976m, but earnings from operations were up only 3.4 per cent to $270m. HP Financial Services posted sales of $952m, up 18 per cent, and operating profits were $98m, up 34 per cent.

That leaves the HP Services behemoth, which had $9.28bn in sales (up 1.7 per cent) and an operating profit of $1.19bn (down 20.8 per cent). Infrastructure technology outsourcing accounted for $3.9bn in sales, up 1 per cent, while technology services made up $2.81bn, up 3 per cent, and application services accounted for $1.8bn, up 2 per cent. Business process outsourcing, on which HP is focusing a little less, fell 2 per cent in the quarter to $683m.

Neither Whitman nor Lesjak provided any more guidance for fiscal 2012, but Whitman said that that was pretty much it for a big acquisition like the Autonomy deal, and that HP might consider deals in the range of $500m or so to round out its portfolio. More importantly, HP would be reinvesting in its own research and development and plans to bring new products to market.

"If we're going to get out of the big M&A business, we have to do R&D," Whitman said.

HP may not want to be an IBM, but Whitman is sure starting to sound a lot like former IBM CEO Lou Gerstner, who pulled Big Blue back from the brink in the 1990s. ®

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