HP's Storage Sales: Not Horrible

While Hewlett-Packard Co.'s (NYSE: HPQ) overall third-quarter earnings results were a deep disappointment, its storage business showed some promise during the quarter, according to analysts -- even though its storage sales dropped 8 percent quarter-over-quater (see HP Q3 Shows Strength in Disk Storage).

As the computer giants main business unit -- PCs -- dipped into the red with a $56 million loss, the company showed 6 percent growth in storage compared with the same quarter last year. Meanwhile, HP's enterprise software sales were down 8 percent compared to the third quarter a year ago, but up 6 percent sequentially. HP said sales of its OpenView software grew year-over-year.

Compared with the performance of the rest of its business, HP’s storage results weren’t horrible, analysts say. But when examined in the context of its competitors' gains, HP certainly seems to be losing share.

While HP’s storage revenues dropped sequentially, rival EMC Corp. (NYSE: EMC) saw its revenues grow 7 percent sequentially, and Network Appliance Inc. (Nasdaq: NTAP) yesterday reported a revenue increase of 26 percent for its most recent quarter (see EMC Sinks Despite Hiking Profits and NetApp Pounds Out Profits).

"EMC took share from HP on a sequential basis," says A.G. Edwards analyst Shebly Seyrafi.IBM Corp. (NYSE: IBM) also seems to have been winning large contracts from storage accounts that used to belong to HP (see IBM Grabs HP's Toys).

HP's loss of share on the storage side didn’t take analysts by surprise. Two weeks ago, Goldman Sachs & Co. analyst Laura Conigliaro wrote in a note that the company’s storage business was facing increased competition.

“While EMC, Dell Computer Corp. (Nasdaq: DELL), and IBM’s positions in storage have gotten stronger, HP storage appears to be falling under increased competitive pressure," she wrote at the time. "Arguably one of the best assets acquired by HP at the time of the merger, Compaq’s storage division seems to be in disarray, with reported layoffs in the sales force and a number of high profile departures/retirements." (See HP NAS VP Skis Off and HP Exec Bolts for EMC.)

Despite losing share to competitors, HP’s storage business seems to be a lot stronger than the rest of its enterprise initiatives. The company’s Enterprise Systems Group, which comprises Unix, Linux, and Windows servers, multiplatform storage, and management software, posted total revenue for the quarter of $3.7 billion. That was down 4 percent compared with the previous quarter, and flat compared with the third quarter a year ago. The group’s operating loss also grew from $7 million in the second quarter to $70 million in the third.

"Although the enterprise group didn’t grow that much... the storage part grew," says Seyrafi. "That’s encouraging."HP posted quarterly earnings of $297 million, or 10 cents per share, compared with a loss of $2.03 billion, or 67 cents a share for the year-ago quarter. Excluding restructuring and acquisition related charges, the company posted a third-quarter 2003 profit of $700 million, or 23 cents a share, compared with pro forma earnings of $420 million, or 14 cents a share for the same quarter last year.

Revenue for the quarter jumped nearly 5 percent to $17.35 billion, from $16.54 billion for the third quarter of 2002.

Analysts polled by Thomson First Call had been expecting HP to earn 26 cents a share on revenue of $17.46 billion.

For the current quarter, HP said it expects to post earnings of between 34 and 36 cents per share on revenues between $18.8 billion and $19.1 billion. Analysts are expecting the company to make 36 cents a share during this quarter.

Following HP’s disappointing results, the company saw its stock tumble 10.5 percent in afternoon trading today, dropping $2.31, to $19.80 a share.— Eugénie Larson, Senior Editor, Byte and Switch