HP's Storage Sneaks Up

Buoyed by strong sales of its storage and blade server products, HP reported a solid set of third-quarter results last night, beating analysts' estimates and side-stepping the spending challenges that have hit its rivals. (See HP Reports Q3.)

The vendor reported revenues of $25.4 billion, up 16 percent on the same period last year, and easily beating analyst estimates of $24.09 billion.

On a GAAP basis, HP's earnings per share were 66 cents on net income of $2.1 billion, up from 48 cents and $1.5 billion in the same period last year. (See HP Announces Earnings.) On a non-GAAP basis, the vendor's earnings per share were 71 cents on $2.3 billion, compared to 52 cents and $1.7 billion in last year's third quarter, and just above analyst estimates of 65 cents.

In an increasingly uncertain economic climate, HP appears to have avoided the spending slowdown that has blighted many of its competitors. (See Sun Slips on Storage, Overland Struggles With 'Softness', LSI Promises Better, and Isilon: The Honeymoon's Over.) "We delivered a really strong quarter, in Q3 we had our strongest revenue growth since 2000," said HP CEO Mark Hurd during a conference call last night. "We saw steady growth across all regions and sectors."

The CEO went on to explain that the vendor's Enterprise Storage and Servers (ESS) division was one of HP's strongest performers. (See HP's Storage & Security Blitz.) "Enterprise Servers and Storage grew 10 percent year-over-year to $4.5 billion," he said, adding that storage alone grew 6 percent, thanks to solid performance from external disk systems.Although HP's tape business continues to decline, Hurd said that this was offset by the vendor's EVA product line, where revenues grew 14 percent compared to the same period last year. (See EVA Qualifies ATTO iSCSI Initiator.) "Given the demand signs we have seen, we feel good about ESS," said the CEO, adding that the division is in "exceptional shape."

The vendor, which has made a song-and-dance about its BladeSystem offerings, also appears to be reaping the benefits of its efforts in the blade market. (See HP Intros Blade Virtualization, Chelsio Joins HP BladeSystem, HP Intros Blade Service, NetXen Teams With HP, and Blade Teams With HP.) HP's revenues from x86 blade servers were up a massive 81 percent year-over-year.

Despite these figures, at least one analyst warned that the vendor could still feel the impact of an unstable economic climate during the coming months. "Shaky macro-economic conditions leave us somewhat wary as to whether end-user IT spending plans might decelerate as we get closer to the 2008 budget planning cycle," wrote Goldman Sachs analyst Laura Conigliaro in a guidance note released today.

HP's third-quarter performance nonetheless represents something of a turnaround for its storage business, which has typically been a blot on the vendor's financials during recent quarters. (See HP's Storage Slowdown, Storage Hurts HP's Quarter, HP Storage Sneaks Up, HP Storage Gets off the Deck, and HP's Relevant Again.)

Earlier this year, HP formed a new unit within its ESS division, bringing together software from different parts of HP in an attempt to breathe new life into the firm's storage business and boost its data management story. (See HP Reshuffles More Software, HP Forms New Unit, and HP Rethinks Storage Plays.)Analysts on last night's call grilled Hurd on the change in HP's storage fortunes, which the CEO attributed to a number of factors. "There's a bunch of things going on," he said, explaining that the vendor was disciplined in its pricing and also benefited from a healthy components market.

The CEO also fielded questions about HP's recent $1.6 billion acquisition of data center automation specialist Opsware. (See HP to Buy Opsware for $1.6B, HP to Acquire Opsware, Opsware Opens Up on Storage, and Opsware Outlines Storage Plan.) Although the exec did not divulge any roadmap details, he reiterated HP's desire to tie server and storage management together through the acquisition. "There's a plethora of tools that have populated the enterprise," he said. "What Opsware gives us are server and storage management pillars with the workflow runbook that runs across these pillars."

Despite these benefits, it could be some time before HP sees the financial rewards of the Opsware deal, according to TBR analyst Stuart Williams. "Opsware will provide HP Software with a stronger value proposition to customers for managing and automating IT," he wrote in a guidance note last night. "However, the acquisition may take years to pay back, given the nearly 20 percent operating margin for the [HP] software business after backing out acquisition and integration expenses."

Despite a solid third quarter, Hurd admitted that there are still areas where he would like to see improvements. "We have a lot more work to do at HP, we're not the finished product at this point," he said, adding that, in particular, he would like to grow the HP sales force with "more feet on the street."

The vendor also used last night's call to raise its fourth-quarter revenue guidance to between $27 billion and $27.2 billion, above analyst estimates of $26.46 billion.In trading today, shares of HP rose 76 cents (1.65%) to $46.81.