HP grows Q3 revenue but servers disappoint

Hewlett-Packard (HP) reported solid revenue growth for its fiscal third quarter Thursday, boosted by sales in its Personal System Group. However, it said that performance in its Enterprise Servers and Storage Group was "unacceptable," and that it would make immediate management changes.

Revenue in the quarter ended July 31 rose to US$18.89 billion, up 9 percent from US$17.35 billion in the year-earlier quarter, according to preliminary, unaudited figures. Net income came in at US$586 million for the quarter, compared to US$297 million a year ago. Pro-forma earnings per share, excluding exceptional items, rose to US$0.24 from US$0.23 in the year-earlier quarter. Analysts surveyed by Thomson First Call expected earnings of US$0.31 a share on revenue of US$19.02 billion.

Earnings per share fell well below estimates, brought down by problems in the company's Enterprise Servers and Storage Group, HP Chairman and Chief Executive Officer Carly Fiorina said in a conference call with analysts and journalists.

Three issues plagued the server and storage group during the quarter, she said. Migration to a new order and supply chain management system in the U.S. proved more disruptive than expected; aggressive discounting and the switch to a centralized claims system led to channel management problems in Europe, and revenue from storage systems was significantly less than expected.

"Execution issues cost us, and we are therefore making immediate management changes," Fiorina said. She declined to name those affected by the changes. She estimated that the issues affecting the servers and storage group cost the company US$400 million in revenue and US$275 million in operating profit.

Problems with the migration to a new order processing system forced the company to fulfill some direct orders through the channel, and to ship some orders by air, adding to costs, she said.

HP's Personal Systems Group made a strong showing, with revenue of US$5.9 billion, up 19 percent year over year, driven by increased desktop sales.

"In general, notebook margins are higher than desktop margins, but they are moving closer together over time. We are getting better at surrounding a desktop with other options that drive an increase in average selling price," Fiorina said.

The increase in PC shipments is not causing a build-up of inventory in the channel: "Our channel position is extremely stable in this business," she said.

On the purchasing side, the company is still maintaining a strategic level of inventory in the Personal Systems Group to guard against problems in component supply, according to Chief Financial Officer Bob Wayman.

HP has deliberately increased inventory in its imaging and printing group, in anticipation of the back-to-school season, but "The only place we have unintended inventory increase is in enterprise," he said.

Fiorina also discussed performance in other divisions.

Software revenue for the quarter increased 17 percent year on year to a record US$223 million, she said. However, the division made an operating loss of US$45 million as a result of investment in the company's Adaptive Enterprise strategy.

Revenue from services revenue grew 12 percent year on year, to US$3.5 billion. Within that, managed services revenue grew 42 percent, and consulting and integration revenue 6 percent.

For the fourth quarter, HP predicts its revenue will be between US$21.0 billion and US$21.5 billion, with pro-forma earnings per share in the range US$0.35 to US$0.39.

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