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Hewlett-Packard’s Enterprise Group business banks on storage and server

Smita Nair

Business overview: Hewlett Packard's turnaround story (Part 5 of 6)

(Continued from Part 4)

Hewlett-Packard’s Enterprise Group (EG) revenue was up 1% year over year to $6.9 billion for fiscal first quarter 2014, but operating income for this group declined by 6% to just over $1 billion. In fiscal 2013, EG revenues declined 5.4% to $28.2 billion. EG offers a broad portfolio of enterprise technology infrastructure solutions such as servers, storage, networking and technology services combined with cloud solutions for a variety of operating environments. Under EG, Industry Standard Servers and Networking revenue increased, Storage revenue was flat, and Technology Services and Business Critical Systems revenues were down in the fiscal first quarter of 2014.

EG’s Industry Standard Servers (ISS) business, which spans a range of server product lines, saw a 6% year-over-year growth in revenues to $3.17 billion in fiscal first quarter 2014 driven by Hyperscale servers and progress on Moonshot systems. In fiscal 2013, HP launched its Moonshot servers that operate on ARM-based and Intel Atom-based processors and offer reduced cost, space, energy and complexity compared to some traditional servers. More than 20 years ago, HP introduced the first commercial UNIX server, the HP 9000 Series 840, as well as the first x86 server, the HP SystemPro. More than a decade later, HP was granted one of the first patents for blade server architectures. The company has remained the x86 server market leader for the last 16 years.

HP’s Storage offerings include flagship product HP 3PAR StoreServ Storage Platform, which is designed for virtualization, cloud and IT-as-a-service. Traditional Storage solutions include tape, storage networking and legacy external disk products such as EVA and XP. Storage revenue was flat in the fiscal first quarter of 2014 at $834 million with 42% increase in converged storage that offset declines in traditional storage. HP’s midrange 3PAR storage unit continued to perform well and the company is optimistic about future growth. In the total worldwide disk storage systems market for the fourth quarter of 2013, EMC (EMC) finished in the top position followed by HP with market shares of 25.8% and 16.3% respectively, according to IDC. According to Gartner, HP’s fourth-quarter 2013 storage business grew 25.3% year-over-year propelled by broad acceptance of the HP 3PAR StoreServ and the StoreOnce disk-based backup platforms. HP overtook Hitachi and HDS to become the fourth largest storage vendor in the quarter, behind EMC, IBM (IBM) and Netapp (NTAP).

In the Itanium-based Business Critical Systems business, which includes HP-UX, OpenVMS, and NonStop systems, revenue was down 25% year over year to $228 million. The business has struggled in the past several quarters due to the decline of Unix, and Oracle’s decision in 2011 to stop development for all its software on Intel’s high-end Itanium server processor. HP later announced plans to port its NonStop platform to the x86 architecture, allowing customers to select either an Itanium- or x86-based platform for their mission-critical needs. This was an extension of Project Odyssey, an initiative announced in 2011 by HP to unify the Unix and x86 architectures for industry-leading availability, increased performance and client choice. HP recently announced the ProLiant DL580 Generation 8 server with the new Intel Xeon Processor E7 v2  and upcoming enhancements to the DL560 and BL660c x86 servers for its scale-up x86 portfolio.

Networking services includes switch, router and wireless LAN products. Revenue grew 4% year-over-year to $630 million in the latest quarter. IDC said HP’s Ethernet Switch revenue increased 3.8% quarter over quarter and 3.6% year over year in the fourth quarter of 2013, just slightly below the overall market levels. HP’s market share now stands at 9.3% behind Cisco with 64%. HP’s full year 2013 growth reached 4.4% year over year.

Technology Services revenue declined 4% over the prior year to $2.12 billion. The segment provides professional and support services and technology consulting. Support services offerings span various customer support needs and include: HP Foundation Care, a portfolio of reactive hardware and software support services; HP Proactive Care, which combines remote support technology for real-time monitoring with rapid access to technical experts; HP Datacenter Care, a comprehensive and flexible end-to-end support for HP and multi-vendor systems that enables customers to build, operate or consume IT in traditional, cloud or hybrid cloud environments; and Lifecycle Event services, which are event-based services offering technology expertise and consulting for each phase of the technology life cycle.

HP’s Enterprise Services division reported a 7% year-over-year decline in revenue to $5.59 billion. Enterprise Services provides technology consulting, outsourcing and support services across infrastructure, applications and business process domains. It is divided into Infrastructure Technology Outsourcing and Application and Business Services.

Software provides IT management, big data and security solutions for businesses and enterprises of all sizes. Its big data solutions include the HP HAVEn Big Data Platform, which, together with the Autonomy and Vertica products, is designed to help customers manage, govern and get faster answers from all of their structured and unstructured information. Software revenues declined by 4% to $916 billion. HP posted double-digit growth in its cloud and Vertica products and Autonomy’s Idol product. Support sales declined 2% year-over-year as a result of historical license revenue declines. Professional services sales declined 12% year-over-year but gross margin improved as HP continued to streamline its portfolio and focus on profitability. SaaS revenue grew 6% over prior year period as the company saw continued momentum. In enterprise services, HP expects the delayed key account run off to continue to pressure growth and profitability as it drives forward the transition from reactive to proactive sales.

HP leads in market share in servers

HP competes with IBM (IBM) and the now-private Dell for businesses that require migration to the cloud, or remote computing services. Hewlett-Packard beat rivals Dell and IBM in the worldwide server market, per Gartner’s fourth-quarter 2013 preliminary worldwide shipment estimates. The company saw a 5.7% revenue jump in factory revenue for the worldwide server market, per IDC’s Worldwide Quarterly Server Tracker report. HP had a 26.9% market share in factory revenue and saw an improvement in demand for its x86-based ProLiant servers, particularly in the U.S. IBM was close with a 26.8% market share for the quarter as revenue decreased 28.5% year over year, IDC said.

HP is expected to see competition from Chinese technology company Lenovo, which acquired IBM’s low-end server business for $2.3 billion in January. Whitman said on the recent earnings call that Lenovo’s acquisition of IBM’S x86 server business creates a “near-term opportunity ” to win market share in the server business as the acquisition could initially create uncertainty in the minds of customers about Lenovo’s product roadmap. H-P’s ProLiant servers run primarily Windows, Linux and virtualization platforms from software providers, such as Microsoft Corporation (MSFT) and VMware, Inc. (VMW), and open sourced software from other major vendors while leveraging x86 processors from Intel (INTC) and Advanced Micro Devices (AMD).

Converged Systems to simplify IT?

In December of last year, the company unveiled ConvergedSystems, aka SHARKS, portfolio for virtualized applications and big-data analytics. The portfolio combines HP servers, storage, network gear, and software to deliver a total systems experience that simplifies IT through quick deployment, intuitive management, and system-level support. This includes appliance systems for Apache Hadoop, HP Vertica, SAP HANA and HP CloudSystem. The company also expanded its Converged Storage portfolio to include a new generation of StoreOnce Backup, StoreAll Archive, and StoreAll Storage systems along with updates for HP 3PAR StoreServ Storage.  It announced the next generation of its flagship private cloud solution CloudSystem 8, integrated with OpenStack technology. As demand for integrated systems continues to increase due to the high amount of data created by companies, HP aims to profit from its family of integrated IT systems as these new offerings will “give enterprises the speed, agility and lower economics to build the next-generation data centres.” Peers such as IBM, Oracle, Dell and Cisco offer similar integrated systems.

According to IDC, the server market is transitioning from a PC centric model to a mobile and cloud based model. IDC has described this paradigm shift as the migration from the 2nd Platform to the 3rd Platform, and said the 2nd Platform workloads continue to represent a healthy profit pool for server vendors targeting consolidation opportunities across the market. However, new profit pools in the 3rd Platform are emerging that create new market opportunities for OEMs and ODMs. IDC believes this market transformation requires increased focus from vendors in order to best capitalize on these diverging market trends.

Continue to Part 6

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