HP's Q3: PCs, Servers, Networking Business Going Strong

Strong PC and server sales and a bump in networking sales helped give Hewlett-Packard the push it needed to see a rise in fiscal third-quarter 2014 revenue over last year.

HP Chairman, President, and CEO Meg Whitman said during the Wednesday financial analyst conference call following the release of the quarter's results that HP is proving it is moving in the right direction.

[Related: HP Divides U.S. Geo Into Three To Streamline Sales, Channel Organizations]

"We've seen the results of our efforts to get our PC and server business back on track," Whitman said.

Whitman also said that she remains confident in HP's future growth. "HP is quicker to recognize changes in markets, and responding faster than ever before," she said.

Even so, the quarter proved to be a bit tough for the Palo Alto, Calif.-based company. It reported revenue for its third fiscal 2014 quarter, which ended July 31, of $27.6 billion, up only 1 percent compared with its reported revenue for the third quarter of 2013.

HP reported GAAP earnings of $1.0 billion, down 29 percent compared with last year's $1.4 billion. HP also reported GAAP earnings of 52 cents per share, down 27 percent from the 71 cents per share it reported last year.

Non-GAAP earnings were reported as $1.70 billion, or essentially flat over last year's $1.68 billion. That worked out to be 89 cents per share, up 3 percent over last year's 86 cents per share.

HP's share prices, which fell about 1.0 percent to $35.12 before the close of the trading day Wednesday, dropped another 0.7 percent a couple of hours after the close of trade.

HP's overall PC revenue rose 12 percent over last year to reach $8.6 billion, with notebook revenue up 17 percent and desktop and workstation revenue rising 8 percent.

The migration from Windows XP was a big driver for HP's PC business in the third quarter, but its main impact has already been felt, Whitman said. "We believe that we are continuing to gain market share," she said.

NEXT: HP's PC, Printers, Servers And Storage Business

During the question-and-answer period on the call, Whitman said that while the PC business -- including tablet PCs but not including smartphones -- has been flat or decreasing slightly and will likely continue doing so, HP expects to continue gaining market share.

"Our relationships with partners is as strong as ever. ... We believe the PC market still has wings," she said.

HP's printer business suffered in the quarter, with total revenue falling 4 percent over last year to $5.6 billion due to a 6 percent drop in consumer hardware sales and a 5 percent drop in supplies sales. Commercial printer hardware was flat year-over-year.

While HP overall sold 5 percent fewer printers unitwise over last year, the sale of inkjet printers and multifunction devices rose, Whitman said. However, she later said in response to an analyst question that HP is focused on selling more printers with significant supplies revenue opportunities. Managed print services is also a tremendous growth opportunity for HP, she said.

Total Enterprise Group sales rose 2 percent over last year to reach $6.9 billion due to a 9 percent rise in server sales and a 4 percent rise in networking sales. However, HP reported storage sales as down 4 percent, technology services down 3 percent, and business-critical systems, which includes Unix servers, down 18 percent over last year.

HP just experienced its fourth consecutive quarter increase in server market share and expects its market share to rise an additional 2 percent in the fourth quarter, Whitman said. The company is also seeing a good win rate against IBM servers as IBM sells that business to Lenovo, she said.

HP's business-critical system business, which has continued to fall quickly since the lawsuit between HP and former partner Oracle over Oracle's decision to not support future software releases for the HP hardware platform, will eventually go to zero, Whitman said.

Whitman also said the coming migration from the Windows Server 2003 operating system will be a significant opportunity for HP, which will follow the same program it used for the Windows XP migration from a marketing perspective.

"[Servers] will be a competitive market. ... But we think we will gain more than our fair share," she said.

HP's storage business fell 4 percent over last year despite growth of its 3Par business. Revenue for HP's converged storage business rose 9 percent over last year, while its traditional storage revenue fell 14 percent.

NEXT: HP's Acquisition Strategy

HP's 4 percent growth for its networking business helped it outperform Cisco Systems in switch sales, Whitman said.

HP also did well with its HP Helion cloud business, which Whitman said enjoyed double-digit revenue growth over last year. Whitman said the HP Helion OpenStack cloud offering and the HP Helion Development Platform are slated to be released in October.

HP's software revenue suffered a 5 percent drop over last year to $959 million due in part to a drop in Autonomy and Vertica sales, Whitman said.

HP, like the rest of the industry, is finding the software business a challenging one as it shifts from traditional licensing to SaaS, Whitman said. However, that will lead to the business growing over time. "But there will be tremendous dislocation in the meantime," she said.

When asked by an analyst about HP's acquisition strategy, Whitman said the company makes acquisitions based on potential returns, and only when it is related to a technology it is not developing organically.

"Given a chance, I would rather invent organically," she said. "R&D is a core of HP."

PUBLISHED AUG. 21, 2014