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HP Q1 Revenue, Earnings Fall, But Prospects Grow On Channel Strengths

HP's server, converged storage and networking businesses were bright spots for its first quarter of 2013, with CEO Meg Whitman praising the company's channel partners for their help.

Hewlett-Packard on Thursday reported that first fiscal quarter 2013 revenue and earnings were down compared to last year, but investors liked what they heard and drove up HP shares in aftermarket training.

HP's first fiscal quarter results were better than expected, while the company gave a new outlook for the second quarter that was better than originally expected, giving hope that the company is on the way to turning its business around.

HP president and CEO Meg Whitman also gave kudos to the channel during the company's financial analyst conference call and said HP is making significant investments in the channel to strengthen that part of the business.

[Related: HP's Whitman Lays Down The Channel Law ]

HP reported revenue for the first fiscal quarter of 2013 of $28.4 billion, down 6 percent from the $30.0 billion the company reported for the first quarter of 2012.

Revenue from HP's America's business fell 3 percent compared to last year.

GAAP earnings for the quarter were $1.2 billion, or 63 cents per share, down 16 percent from the $1.5 billion the company reported last year. Non-GAAP earnings were reported as $1.6 billion, or 82 cents per share, down 12 percent compared to last year's $1.8 billion, or 92 cents per share.

Fiscal year 2013 is the second year in HP's plan to turn its business around, Whitman said on the conference call.

"I called 2013 as a fix and rebuild year. ... With the first quarter 2013 behind us, we can see some traction as we rebuild for the future," she said.

Investors were excited by the results, driving HP shares up 6 percent just minutes after the results were announced. Three hours later, shares were still up well over 5 percent.

Whitman said during her prepared remarks that HP has made significant investment in the channel during the quarter, including some changes announced this week at HP Global Partner Conference, such as simplified rebates, higher designation of partner levels and more marketing funds for partners.

"I can tell you, we were very excited by what we saw [at the conference]," she said.

NEXT: PC Business Hurting


HP's personal systems business revenue for the first quarter fell 8 percent over last year to $8.2 billion. Notebook PC shipments fell 14 percent, and revenue fell 16 percent over last year, but desktop PCs did much better, with unit shipments up 10 percent while revenue down 4 percent. HP's commercial PC business fell 4 percent over last year, a relatively mild slip when compared to the dramatic 13 percent decrease in consumer PC revenue.

However, Whitman said, HP did relatively well compared to the market, which was hit by weak demand, especially in Europe, Middle East, and Africa (EMEA), as customers turned more towards other mobile devices. HP actually gained 1.4 points of worldwide market share over last year, including a strong 4.6-point gain in share in the U.S.

Whitman also bragged that HP was the first to release ultrabooks and tablet PCs for commercial users.

"It's going to take us some time to get back, but we've made some strong advances in the last year," she said.

Cathie Lesjak, HP executive vice president and CFO, said on the conference call that HP expects HP's personal systems revenue to fall in the second quarter vs. the first quarter because of an overall declining market situation, with weak demand and price competition for all of 2013 expected to erode margins.

Even so, when asked by a financial analyst about whether HP will consider breaking off its PC business, Whitman replied that HP is still better together as a whole company because of scale, supply chain and other factors.

"We have no plans to break up the company," she said.

HP's printing business revenue fell 5 percent year-over-year to $5.9 billion, with commercial printer hardware unit shipments falling 6 percent and consumer shipments falling 13 percent, leading to a supplies revenue drop of 5 percent.

However, Whitman said, HP's OfficeJet Pro sales rose 32 percent over last year, and HP is preparing to roll out the new OfficeJet Pro X series in the near future.

The HP Enterprise Group's revenue fell 4 percent over last year to reach $7.0 billion, with industry-standard server (ISS) revenue down 3 percent, storage revenue down 13 percent and Business Critical Server (BCS) revenue down 24 percent compared to last year.

That BCS revenue drop stems from pressure caused by HP's legal disputes with Oracle over development of software for HP's Itanium-based servers. Lesjak said phase 2 of the HP-Oracle trial, which will determine Oracle's liability, is scheduled to begin in the second quarter.

However, there were a couple of bright spots.

NEXT: HP's Enterprise Business Looking Good


Despite the overall 13-percent drop in storage revenue, HP's converged storage revenue rose 18 percent over last year, nearly matching the 21-percent drop in traditional storage revenue.

HP's converged storage business, which includes its 3PAR storage line, StoreOnce deduplication technology, StoreVirtual virtual storage appliance line and StoreAll unstructured data storage technology, has become a real emphasis for the company as sales of its traditional tape and EVA and XP disk lines slip, Whitman said.

However, she said in response to an analyst question, the increased sales of HP's converged storage offerings does not come as a result of cannibalizing sales of its traditional storage.

"Our sales team can only focus on one thing at a time, and converged storage is more disruptive," she said.

Both Whitman and Lesjak said they are confident in HP's storage business going forward as the increase in converged storage revenue quickly overtakes the drop in traditional storage sales.

HP's networking business, which saw revenue rise 4 percent over last year, was another bright spot. Lesjak said HP continues to take market share. "We are the first in the market with a full software-defined networking [SDN] solution," she said.

Furthermore, Whitman said, HP's ISS business has stabilized, and HP expects to grow its 2013 x86 server market by 1 point over last year.

HP also has high expectations for its Project Moonshot line of ARM processor-based servers, which Whitman said are slated to be finally commercialized in the second quarter.

Sales of Project Moonshot servers, which consume 86 percent less power and 94 percent less space while cutting server costs by 63 percent, are expected to build through 2013, with initial customer shipments going to Japan, which suffered power grid disruptions after last year's Tsunami, Whitman said.

"But I don't think it will hit its full stride until next year," she said.

HP's enterprise services revenue fell 7 percent year-over-year to $5.9 billion, while its software revenue fell 2 percent to $926 million. That drop in software revenue was driven by a 16 percent drop in license revenue and an 8 percent drop in services revenue, which more than made up for an 11 percent increase in support revenue.

Even so, Whitman said, HP experienced high double-digit growth in its security software and its Vertica business analytic software business, and that HP's Autonomy business was starting to stabilize.

"But [Autonomy's] still a work in progress, and it will take time to get back on track," she said.

HP Financial Services revenue rose 1 percent to $957 million.

PUBLISHED FEB. 21, 2013

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