HP Storage Slammed

For weeks now, storage vendors have whined that poor results at Hewlett-Packard Co. (NYSE: HPQ) are a drag on earnings. Today, HP CEO Carly Fiorina said HPs storage is bringing down the entire company.

Fiorina blamed the Enterprise Servers and Storage (ESS) division for HP’s woes last quarter, identifying storage as a particular problem (see HP Reports Q3 Earnings).

In a conference call with analysts this morning, Fiorina said solid results in other parts of HP “were overshadowed by unacceptable execution in Enterprise Servers and Storage. We therefore are making immediate management changes. We are also accelerating our margin improvement plans in this business. With these changes, we expect our server and storage business to return to profitability in the fourth quarter.”

The management changes were not storage-specific, as three members of the customer solutions group (CSG) were replaced with executives from inside the company hours after the earnings report. The CSG is HP’s enterprise sales team. Chief marketing officer Mike Winkler replaces Peter Blackmore as CSG Executive VP. Jack Novia, formerly senior VP of HP’s technology solutions group, replaces Jim Milton as CSG SVP for the Americas. Bernard Meric, former SVP of HP’s Europe, Middle East, and Africa (EMEA) printer division, replaces Kasper Rorsted as head of the CSG in EMEA.

Bob Schultz, senior VP of network storage solutions, heads HP's storage team. Ann Livermore was appointed executive VP of HP's Technology Solutions Group last December as part of a reorganization that included storage (see HP Reorg Highlights Storage).Industry insiders say leadership has been a problem at HP storage since the company merged with Compaq in 2003. Top storages executives left soon after, mostly for rival EMC Corp. (NYSE: EMC), which poached current EVPs Howard Elias and Mark Lewis, and SVPs Mark Sorenson and Rainer Erlat from HP (see Elias Flees HP, HP Exec Bolts for EMC, and Lewis Quits HP for EMC).

Meanwhile, the numbers have folded like a cheap lawn chair. Last quarter, HP's total storage revenue was $709 million, down 15 percent from the same quarter last year. Combined revenue from midrange EVA and high-end XP storage systems declined 23 percent, and tape library revenue dropped 16 percent. The ESS division reported an operating loss of $208 million for the quarter, down from a loss of $20 million in the same quarter last year.

Fiorina blamed the problems in part on the division’s migration to a new SAP system that shut down production for six weeks instead of three weeks as planned. She also cited problems with channel management in Europe. But she acknowledged that HP’s storage products aren't meeting expectations.

“Our competitive position is not where we would like it to be right now,” she said.

Storage analysts have been saying that for a while, as HP has steadily lost ground to competitors such as EMC, IBM Corp. (NYSE: IBM), Network Appliance Inc. (Nasdaq: NTAP), and Dell Inc. (Nasdaq: DELL).“This is not a surprise,” says Arun Taneja of the Taneja Group. “The handwriting has been on the wall for at least six months, maybe a year. There’s hardly any innovation on the storage side. Their virtualization is in disarray, their storage boxes are not competitive, and they have no NAS to speak of.”

Fiorina said she hopes recently announced products and more coming in September will help return storage to profitability, but HP’s storage problems may run too deep for a quick fix (see HP Announces SATA Enclosures and EMC and HP Spin Disk).

The decline started before last quarter. According to IDC, HP’s first-quarter disk storage systems revenue dropped 6.1 percent, while the overall market gained 3.5 percent (see HP Storage Share Slips). IDC will release its second-quarter numbers next month, and HP’s announcement today hints it will lose more ground.

Today's announcement was foreshadowed by claims from HBA vendor Emulex Corp. (NYSE: ELX) and tape library company Overland Storage Inc. (Nasdaq: OVRL) that poor performance by a major OEM hurt their sales. In both cases, insiders fingered HP as the OEM (see Emulex Cuts Guidance, Jobs and Overland Guides Under). Sources also say poor sales through HP cut into Brocade Communications Systems Inc.’s (Nasdaq: BRCD) switch sales, although Brocade has yet to announce its earnings (see Switch Vendor Silence Is Golden).

— Dave Raffo, Senior Editor, Byte and Switch0