Inside Advanced Scale Challenges|Saturday, November 18, 2017
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HP Adds To Layoffs As Sales Dip 

The turnaround of Hewlett-Packard under CEO Meg Whitman is not quite accomplished yet, with revenues flat and net income up decently in the second quarter of its fiscal 2014 ended in April. In the quarter, the company continued to have mixed results in its systems business, and the PC business did pretty well by comparison. Overall, sales fell by 1 percent to $27.31 billion, a little shy of Wall Street's expectations. But thanks to cost-cutting and an ongoing restructuring and rebalancing of its workforce, $1.27 billion dropped to the bottom line, an increase of 18.2 percent over the prior year's quarter.

"As I have said before, we continue to see an acceleration of the massive shifts that are transforming the way that customers buy, pay for, and consume technology," Whitman said on the call with Wall Street analysts going over the financial figures. "This reality is creating both opportunities and challenges for HP and every one of our competitors. To win, we have to continue to focus, and make HP a more nimble, lower-cost, and customer- and partner-centric company. We have made a lot of progress to that end over the past two years, but we still have more work to do on our structure, our systems, and our go to market."

To that end, HP now says that it will be boosting the number of layoffs from its 2012 restructuring program, by between 11,000 and 16,000 people. Back in 2012, the plan was to shed up to 34,000 workers to get costs and revenues more in line with each other. "No company likes to reduce their workforce, but the reality is that HP must be manically focused on reducing our cost structure."

In the enterprise space, one of those cost-cutting measures is the new partnership that HP announced with Taiwanese contract manufacturer Foxconn at the end of April. The partnership will combine the system design and manufacturing expertise of Foxconn and the HP branding and support and through its sales channels to attack the hyperscale datacenter and service provider markets. Companies operating in these markets, as well as some of the largest commercial enterprises in the financial services, energy, retail, distribution, and government sectors who have similar scale needs and stingy budgets, for the most part want servers and increasingly storage and switching customized for their workloads, and they are not willing to pay a premium for the privilege, either. It is not clear if that HP-Foxconn partnership driven any of the additional layoffs announced by Whitman today.

In the quarter, HP's Industry Standard Servers division, which sells tower, rack, and blade servers based on X86 processors, had $2.83 billion in sales, up 1 percent and marking the third consecutive quarter of revenue growth for this division. HP has over a hundred beta customers with its Moonshot systems, aimed at hyperscale deployments where microservers make sense compared to traditional two-socket workhorses. The company has over 40 Moonshot partners at this time, too. But she warned that Moonshot revenues would not "become material in the near term" even if it was "on its way to becoming a disruptive product in a new category of servers."

The Business Critical Systems division, which sells Itanium-based machines running HP-UX, NonStop, and OpenVMS as well as high-end ProLiant machines based on the Xeon E7 processors from Intel, had a 14 percent decline to $230 million. Storage continues to be a problem for HP (as it is for IBM and Dell), with traditional storage arrays seeing an 8 percent decline and more modern converged storage products (3PAR, StoreVirtual, and StoreOnce lines) seeing a 3 percent dip to $338 million. Whitman said that customers seemed to pause in the quarter to contemplate all of the new products that have come out from HP and its competitors in recent months.

HP's networking business was a relative bright spot in the Enterprise Group at HP in the second quarter, with sales up 6 percent to $658 million. Both switching and routing products grew in the quarter, and HP also had growth across all regions in its networking business.

Technology Services, the part of the company that does break-fix and other kinds of maintenance for HP wares, had a 5 percent decline to $2.13 billion.

Add it all up, Enterprise Group posted revenues of $6.66 billion, down 2 percent, and had an operating margin of $961 million, down 10.5 percent. It is hard to say where HP is under margin pressure, but it is reasonable to assume that at least some of it is coming from the hyperscale and service provider crowd – especially given the Foxconn deal. All that Whitman said about the enterprise space was that she continued to see a "a very competitive market" and that it would take a few more quarters for the changes HP has made in Enterprise Group to take hold.

HP Software had $917 million in sales, flat year-on-year, and posted an operating profit of $186 million, up a smidgen. HP Financial Services posted sales of $867 million, down 2 percent even though financial volumes rose 12 percent year-on-year, with an operating profit of $99 million, up 2 percent. Enterprise Services had sales of $5.7 billion, down 7 percent, and operating income fell by 13.4 percent to $201 million for this part of the company.

HP's Personal Systems business rebounded by 7 percent to $8.18 billion, and this only matters to enterprise customers inasmuch as a healthier PC business gives HP more leverage with its component suppliers, which can help lower the costs and boost the profits of HP's systems business. The Printing division, which is the key profit engine of HP, had a 4 percent revenue decline to $3.87 billion. Both PCs and printers (including ink and toner) saw operating margins rise, and together they accounted for $2.69 billion in operating margin in fiscal Q2, an increase of 11.4 percent.

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