Heads Roll As HP's Enterprise Server and Storage Business Takes Major Hit

The poor performance has cost the jobs of two top former Compaq Computer execs who joined HP in 2002 following the merger of the two companies. Peter Blackmore, executive vice president for HP's customer solution group (CSG), is being replaced by chief marketing officer Mike Winkler, and Jack Novia, who was senior vice president of HP's CSG is replacing Jim Milton. Also Bernard Meric is replacing Kasper Rorsted in the EMEA region. The moves were confirmed by an HP spokewoman.

By posting a loss of $208 million in its ESS business, compared to a $20 million loss for the same period last year, investors sent HP shares reeling down 13 percent on Thursday. Overall during the third fiscal quarter, HP posted a 9 percent revenue gain to $18.9 billion, quarter-over quarter.

HP chairman and CEO Carly Fiorina said ESS' shortfall in revenue was the primary reason the company failed to meet analysts' profit and revenue expectations for the quarter. She described the ESS results as "unacceptable performance" and said management changes are coming. "Executions issues cost us," Fiorina said. Among those execution issues was the migration to a new order-processing and supply-chain management system, which took far longer to implement than expected. Fiorina also blamed the shortfall on channel management and compensation issues in Europe. Third, HP's storage business fell far below plan.

Total storage revenue of $709 million was 15 percent lower quarter-over-quarter. Online storage revenue, which includes HP's EVA and XP storage lines, were down 23 percent year-over-year, while nearline storage, which includes its tape library business, declined 16 percent. But some argue that HP's problems in its ESS business stem from more than a single quarter blip.

For example, HP's storage business lost significant share in the first calendar quarter to EMC, according to IDC. For the first quarter, HP's share was down to 18 percent from 19.3 percent year-over-year, while EMC gained three points, or 20.2 percent share. "There's no comparison between EMC's performance and HP's performance," said IDC analyst John McArthur, noting HP has fallen short in both its XP and EVA storage product lines. "You can't be falling short in the midrange and expect to be holding share."

Don Richie, CEO of Sequel Data Systems, an Austin, Texas-based HP partner, said that HP's server and storage business having trouble executing, far transcends a single quarter blip. It stems from the rollout of its new eHIP program by which partners order inventory from distributors, who also now set pricing instead of HP. Under eHIP, HP is still responsible for drop-shipping the inventory.

Richie said eHIP has been fraught with trouble from day one when it was launched Feb 1. It now takes anywhere upward of a week or more just to get price quotes, and orders have been delayed as much as 90 days. Many SKUs have been outright unavailable. "We've been able to hold our own with existing customers, but how are we supposed to be able to attract new business if we can't even offer pricing?" Richie asks. HP's enterprise partners also remain frustrated by the company's mixed message toward the channel. As reported last month, Kevin Gilroy, who earlier this year was tapped to head North American channels, was named senior vice president of worldwide SMB segment operations. While clearly a promotion, the move has left channel partners angry over the constant flux within HP's channel organization. "When Kevin took over channels, I was encouraged that predictability would finally get better with HP," says Gary Melillo, vice president business development for Melillo Consulting in Somerset, N.J. While HP dedicated partners like Sequel's Richie have no plans in changing loyalties, others are looking to see what IBM and others have to offer. "IBM has been making many overtures toward us," said Howard Cohen, executive vice president of New York-based MTM. "And we're listening."