HP's Storage Slowdown

HP, which recently reorganized its StorageWorks division, reported a solid set of second-quarter results today, although storage performance remains mixed. (See HP Reports Q2 Results, HP Creates New Biz Unit, HP Thinks Small, and HP Rethinks Storage Plays.)

The vendor's quarterly revenue was $25.5 billion, up 13 percent on the same period last year, just beating analyst estimates of $25.46 billion.

HP's earnings per share were 65 cents, down from 66 cents in the year-ago quarter. Net income, excluding a tax settlement gain, was up 27 percent to $2.1 billion in the second quarter of 2007. On a non-GAAP basis, net income was $2.3 billion, up 30 percent on the same period last year, also excluding a tax settlement gain. Non-GAAP earnings of 70 cents were up from 69 cents in the second quarter of 2006. Analysts had projected earnings of 33 cents.

The vendor's Enterprise Storage and Servers (ESS) division was a mixed bag in the second quarter. Overall revenues were $4.6 billion, up 8 percent over the prior year, with server revenues up 17 percent and blades up 58 percent. (See HP Intros Blade Service, FileX Joins HP BladeSystem Program, and Will Blades Cut Path for 10-Gig?)

Storage was a different story, with overall revenues growing just 1 percent. "Weakness in tape and the high end was offset by strong performance on the midrange EVA line," said CEO Mark Hurd during a conference call earlier today, explaining that EVA revenues grew 10 percent.The results represent a slowdown in HP's storage operation, which grew 3 percent year-over-year in Q1, thanks largely to 18 percent growth in the EVA portfolio. (See HP Storage Gets off the Deck, HP's Relevant Again, and EVA Qualifies ATTO iSCSI Initiator.)

This is not the first time that storage has been a blot on HP's financials, and it seems that Hurd's recent call for better demand creation is yet to deliver results. (See Storage Hurts HP's Quarter and HP Storage Sneaks Up.)

Earlier this year HP formed a new unit within its ESS division, bringing together software from different parts of HP in an attempt to breathe new life into the firm's storage business and boost its data management story. (See HP Reshuffles More Software, and HP Forms New Unit.)

One analyst on tonight's call asked Hurd whether HP plans any M&A to bolster its data warehousing effort. "Buying companies that provide standard hardware, standard database stuff, would not be of keen interest to us," he replied, adding that any future M&A is likely to be along the lines of the vendor's recent Knightsbridge acquisition. (See HP Buys Knightsbridge Solutions.)

The last few months have also seen HP, like other storage vendors, launch a concerted push into smaller businesses wrestling with their own data explosions. (See HP Intros All-in-One for SMBs, HP Builds SANs for SMBs, HP Fills In SMB Storage, IBM Debuts Low-End SANs, and EMC Eyes SMB Push.) Analyst firm Enterprise Strategy Group estimates that the average SMB today uses between 3 and 5 Tbytes of storage, although this figure is expected to grow to at least 10 Tbytes in the near future.At this stage, it would seem that HP is still waiting to reap the benefits of these initiatives, although the vendor at least managed to avoid some of the U.S. spending slowdown that dogged some of its rivals' recent results. (See Overland Struggles With 'Softness', Sun Slips on Storage, LSI Promises Better, and Isilon: The Honeymoon's Over.) "The U.S. enterprise behaved pretty much as we expected in Q2. It was pretty stable," said Hurd.

He promised that the vendor will nonetheless continue its recent efforts to drive costs down through real estate and IT consolidation. (See HP to Consolidate Data Centers and HP to Reduce Energy Use.) "We had a strong second quarter [but] I don't want to confuse you, we're still transforming, we're not close to being done."

HP CFO Cathie Lesjak explained that savings from the vendor's real estate consolidation were already being used to hire more sales staff, adding that the vendor is implementing an "enhanced early retirement plan" in an attempt to drive costs down further.

James Rogers, Senior Editor Byte and Switch