Number 98 (Update of Volume 9, Issue 7)

HP fires all cylinders in quarter, but promises TSG cuts

HP has posted the third straight quarter of profits for its Enterprise Storage and Servers group, part of a Q2 2004 report that showed revenue growth and profits for nearly every HP business line. Enterprise Systems, which includes the HP 9000 product line that HP recommends as an HP 3000 replacement, has had a different mission than other HP business segments. HP CEO Carly Fiorina said HP’s ESG focus “has been on returning the business to profitability. First-half profits are up almost $250 million. And we are now demonstrating that we can grow this business.”

Overall, HP has placed the Enterprise business into a Technology Solutions Group (TSG) which reported second-quarter revenues of $7.7 billion, up 11 percent from the prior year period, with each business reporting record quarterly revenues in the second quarter. HP finished the reorganization just as the second quarter ended, reporting Enterprise performance across three segments: Enterprise Storage and Servers, Software, and Services.

The report included a record total for revenues in an HP quarter ($20.1 billion), while the company continued to post the majority of its profits from its Imaging and Printing business. HP also said its business mix in server sales is shifting toward lower-margin models, such as its ProLiant industry-standard servers. ProLiant Blade servers were HP’s fastest-growing server category.

Analysts in the Wall Street Journal had praise for the performance of HP, a company whose financial fortunes will remain important to the HP 3000 owners who are migrating away from the server. "Very seldom do most of H-P's cylinders all fire at the same time," said Robert Cihra, an analyst at Fulcrum Global Partners. "It was a solid quarter across the board."

Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., said HP sales growth didn't necessarily translate into improved profitability for its enterprise server products. "H-P continues to face question marks over why it isn't able to drive upside in profitability," said Sacconaghi.

HP said it will be working on profitability across the TSG group that includes Enterprise Storage and Servers. Its Its 12 percent sales increase included “Leading the way with a strong performance in industry standard servers, which grew 15 percent year-over-year in revenues and 32 percent in units,” said Fiorina. One out of every four servers that HP sells is now an Integrity, Itanium-based unit, and Superdome sales and orders set an HP quarterly record.

Despite the upturn in Enterprise sales, however, HP has cast an eye to improving profits in the unit that makes and sells servers that employ HP-UX and Windows 2003 for enterprise customers. Bob Wayman, HP’s CFO, said cost cuts will take place during the third quarter for TSG operations which include these servers.

“The hardware market continues to move to standard-based products with lower gross margins,” Wayman said in an analysts’ conference call. “As such, we will continue to evolve our business model to streamline our cost structure, particularly in TSG.”

News of the HP quarter lifted the stock by less than $1 a share in day-after trading, and pushed the HP shares into the top five most active issues for May 19. HP now has $15 billion in cash, and the company is considering another stock repurchase to lift its share price, which remains in the $20 range after more than three years.

“We are in the process of deliberating with the board as to what we do, if anything, with the [$15 billion] cash balance,” Wayman said. HP’s credit rating for its commercial paper, which was negative last year, has started to improve, Wayman said, opening the door to stock buybacks. “If our cash balance goes up, even the credit rating agencies understand we have to do something with that cash at some point. You can't just let it sit there forever.”

HP also took a charge of $70 million on its earnings to settle a dispute between HP Canada and the Canadian Department of National Defense. HP agreed to reimburse the government of Canada $105 million. A police investigation into billing irregularities prompted the dispute, which HP claims is the work of subcontractors. “We intend to take legal action to recover the funds from the responsible parties,” said Fiorina. In March the company issued a statement that it “believes that there is no merit to the government's demands and intends to defend vigorously any claim, if brought."

IBM touts “Migration Factory”

A company IBM purchased last year is at the center of what the vendor calls a Migration Factory responsible for close to 20 conversions of HP and Sun enterprise customers to IBM solutions. Sector7, based in the NewsWire’s home town of Austin, built its experience on migrating software applications. IBM says it’s now in talks with “hundreds” of other corporations that currently use solutions from Sun and HP, work that would lure these companies onto IBM’s pSeries or iSeries servers running IBM’s Unix, AIX.

IBM said that customer uncertainty among HP’s customers was playing a role in the conversions. IBM could name only one company that made the switch to its servers, First Health Group Corp. The firm is part of the Foundation Health Plan which bought HP 3000 shop Qual-Med, based in Pueblo, Colo. Qual-Med developed its own MPE/iX healthcare application. Facets, an AIX-based application, has been displacing Amisys sites running HP 3000s.

IBM executives say the Migration Factory will offer its worldwide partners access to the services at the factory. Telecom and financial services sectors have provided about half of the IBM wins through the Factory -- two sectors where the HP 3000 hasn’t had much of a presence.

PatchWatch: Ultrium LTO support arrives

HP gave its customers notice that patches MPEMXJ3A (for 7.0 MPE/iX) and MPEMXJ3B (for 7.5) are now in general release. The software gives HP 3000s’ MPE/iX tape driver the ability to set hardware compression on a Ultrium/LTO tape drive.

While many HP 3000 shops don’t have Linear Tape Open devices attached to their systems yet, the LTO units will make their case for better throughput and capacity soon. Most 3000 shops don’t apply patches quickly, however, choosing a strategy that keeps the sites more stable and less forward-looking. HP put these patches into General Release, a status that remains elusive for enhancements like the new WebWise Web server, still in beta test.

DDS compatibility made easy

LTO support might seem new to a lot of customers running HP 3000s. But some sites still can’t be sure if DDS-4 or DDS-5 will run with their tape drives attached to HP servers. (We won’t even go into whether DDS has worn out its welcome in IT datacenters, because of its unreliability. Too much software is still exchanged on DDS for it to disappear soon.)

To get the full scope of DDS support options for HP 3000s, OpenMPE has made an extensive chart available online. Christian Lheureux did the research, before he ended his term on the OpenMPE board this spring. You can see the chart (beware, it is in both French, and English) at www.openmpe.org/DDS_Comp_Matrix_2003_04.htm. HP’s official support for DDS on the 3000 ends with DDS-4, by the way, although HP makes a DDS-5 tape device.

Ecometry crows over 3000 users’ success

Direct commerce software provider Ecometry announced that the magazine Catalog Success lists 28 catalogs powered by Ecometry in its second annual ranking of the 200 top North American based catalog operations.

More than 90 percent of the Ecometry installed base is still using HP 3000s. The company confirmed that only a handful have migrated away from the platform after two years.

The “Top 200” ranking was based on recent house file growth rates and only included catalogs that have rented their lists during the last year. Catalog Success accessed the database of their data partner, Marketing Information Networks (MIN), a data card database system. MIN verified the list rental data.

Ecometry sites that made the top 200 list included No. 3, Title Nine Sports, a California cataloger of fitness wear; Brookstone, a multi-channel marketer of gifts and personal use products, at No. 8; Musician’s Friend, the largest direct response musical instrument retailer in the United States, at No. 124; as well as Swell, MacMall, Seeds of Change, TLA Video, Stumps and Diamond Essence.

Ecometry President John Marrah said, “We are pleased to see so many Ecometry users among Catalog Success’s ‘Top 200 Catalogs’ and we congratulate them on their growth. These progressive companies have proven their excellence in customer service, and I feel confident in saying that the benefits of using Ecometry, a truly customer-centric system, has spurred their success.”