HP's Fortunes Rise, Undaunted by Scandal

Analysts have also been split as to what the effect of Windows Vista - to be released to volume licensees on Friday, though not to consumers until January 30 - will have on the PC market, with some predicting a modest surge, and others predicting something more on the order of doom with customers preferring not to buy an XP-endowed system and a coupon for the meantime. While HP has historically been bullish on the prospects of products from its partner company, Microsoft, Hurd this time uncharacteristically dismissed Vista as something of a wash.

"I think right now, as it relates to the short term," remarked Hurd, "we just don't know what'll happen as it comes up to the holiday - really, not just the holiday, but post-holiday introduction may be a window that we just can't forecast well enough in, to be able to tell you exactly how it'll work out. As it relates to the long term, we feel good about it. We feel good about our positioning within Vista, we think we were well-positioned from an offering perspective, and clearly not just Vista, but the collection of where we see demand, based on what market segment...by region, and our product lineup combining...yeah, we feel pretty good about where we're positioned."

Last March, The New York Times reported that it had learned from a well-placed, anonymous source that it was HP that petitioned Microsoft to delay the release of the consumer edition of Windows Vista until after the holidays. An HP spokesperson denied the Times report of something closer to an ultimatum, though conceded that the company did make its "preferences" known to Microsoft. If the Times report was correct, and the delay actually helped HP to ready its promotions in time for release, then Hurd's attitude on Thursday seems a little contradictory.

One doesn't typically think of HP as a software company, and last year, it seemed the possibility of shutting down or jettisoning that division was among Hurd's options. But the acquisition of SOA enterprise software provider Mercury Interactive last July helped the company boost its software revenue last quarter to $349 million, with a delightful margin of 17.2%.

The costs of acquiring Mercury, though, will weigh a little more on HP going forward, as it expects to write down those costs in the first quarter of fiscal 2007. Earnings per share may dip to no lower than $0.60, according to company guidance, though they're not expected to tumble.

If there is an underperformer in HP's stable of divisions this past quarter, it was the storage division, and Mark Hurd let everyone know it. "It's a business that's worked hard to improve its operating margin," he told an analyst, "which is done, and I think that part's a positive, so I don't want to take away from that. But to be very blunt, I'm disappointed in the revenue growth of the business...We actually have a pretty strong product lineup right now, and we just need to do a better job from a demand creation perspective." It's a sales and marketing problem, he stated, not a product problem.

Although the Enterprise Storage and Servers (ESS) division earned $502 million on $4.7 billion of revenue, high-end storage systems revenue actually declined by 3% annually, as did tape storage. Mid-range storage array growth was a more tolerable 11% year-over-year, but what truly saved the division was a 77% annual revenue gain in HP's Integrity mid-range servers business, and a 38% gain in its blade servers business.

The only wisp of a mention of HP's trouble in the integrity (lower-case "i") department came in Hurd's prepared remarks at the beginning of Thursday's conference: "We also simplified our structure. We collapsed matrices," he said, using some catch-phrases coined last year when he first announced HP's restructuring plan. "We created greater clarity of responsibility, focused on accountability, attracted talent to our management bench, and rewarded our employees for hard work and improved performance."

Another 4,200 employee positions were eliminated during the last quarter, bringing the estimated headcount reduction since the start of the restructuring plan to about 14,200. About 1,000 more employees are expected to be let go next quarter.