Troubled HP server group sees profit in Q4

The division reported a 7% revenue jump

Hewlett-Packard Co. yesterday reported that its troubled Enterprise Storage and Servers group bounced back to profitability during the company's most recent financial quarter, as HP saw its overall revenue rise 8% to $21.4 billion.

HP yesterday reported that net earnings for its fourth fiscal quarter, which ended Oct. 31, were $1.2 billion, or 41 cents per share, including $136 million in after-tax adjustments. Excluding the adjustments, HP's net earnings were $1.1 billion, or 37 cents per share, for the quarter.

The Enterprise Storage and Servers group reported an operating profit of $107 million and a 7% increase in revenue (see story). Several key executives in that group were fired during the quarter following a botched migration to a new order-processing system (see story). The group recorded $4.1 billion in revenue for the quarter.

Problems with the order-processing system, which affected sales of HP's ProLiant servers, have been resolved, said HP Chairman and CEO Carly Fiorina. HP shipped a record number of ProLiant servers during the period; unit shipments were up 18% from the fourth quarter of 2003, she said.

HP reversed declines in sales of its NonStop fault-tolerant systems. But sales of the company's Alpha servers, which HP is in the process of phasing out, dropped 27% year-over-year. Fourth-quarter revenue from NonStop servers was up 13%, and quarterly revenue for HP-UX systems was up 8% compared to last year, Fiorina said. NonStop sales were down 25% year-over-year during the third quarter.

Sales of the company's Itanium-based Integrity servers now make up 16% of HP's high-end "business-critical" server revenue, up from 5% a year ago, Fiorina said.

Managed services continued to be a fast-growing component of HP's services business. That area grew by 35% year over year, fueled by $1.1 billion in services deals signed during the quarter with Nokia Corp., Starwood Hotels & Resorts Worldwide Inc. and WestLB AG, Fiorina said (see story).

"They have nailed down some pretty impressive outsourcing and managed services contracts," said Terry Shannon, the publisher of "Shannon Knows High Performance Computing", a newsletter focused on HP. "They're strongest in services and printing and imaging right now," he said.

HP Services reported a profit of $367 million for the quarter, with revenue up 13% from same period last year to $3.7 billion.

The company's Imaging and Printing Group reported a quarterly profit of $1.1 billion on revenue of $6.5 billion. HP sold 14 million printers during the quarter, but total revenue was up only 5% from a year earlier.

HP's storage division continued to struggle. Networked storage revenue was down 9% compared to last year's fourth quarter, despite the introduction of a number of new storage products during the quarter, Fiorina said. "Storage is a business with long sales lead times and it will take more than a quarter or two for us to achieve the results we expect," she said.

HP's Personal Systems Group, which sells desktop systems and notebooks, eked out an operating profit of $78 million on sales of $6.5 billion during the quarter, its strongest performance since 2000, according to HP.

Both the Enterprise and Personal Systems groups have yet to live up to HP's expectations, Fiorina said. "We are not yet to our target levels of profitability in either one. We continue to plan for and expect profit improvement in both."

And while Fiorina said the enterprise market showed signs of "strengthening" during the fourth quarter, she didn't appear to hold much hope that the holiday season would bring a dramatic change of affairs in the Personal Systems Group. "From what we can tell, and obviously it's early going here ... our current read of the consumer season is that it's not bad but not spectacular," she said.

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