HP Storage Takes a Hit

Despite strong overall earnings, Hewlett-Packard Co. (NYSE: HPQ) says storage revenues have dropped since last year. In its report last night, execs said midrange system revenues have been hurt by pricing pressure in the face of an upcoming product cycle (see HP Reports Record Q2).

HP reported $897 million in storage revenues for the quarter -- up 7 percent sequentially but down 3 percent year over year (see In Search of the Missing Uptick). CEO Carly Fiorina says revenues from high-end systems and storage software increased, while tape and midrange systems dropped.

The storage numbers were far less rosy than HPs overall earnings. The company announced revenue of $20.1 billion, up 12 percent year-over-year and 3 percent from the previous quarter.

So what happened with storage? In a conference call with analysts, Fiorina said pricing pressures hurt midrange storage revenues. She said HP discounted prices in anticipation of bringing out new systems this year, but there is speculation that discounts by EMC Corp. (NYSE: EMC) and perhaps other competitors also squeezed HP. The decline in tape was expected after HP got out of the OEM tape library business last year.

Fiorina said she expects better storage results in the current quarter, following HP's rollout of 30 new or upgraded storage products in recent months. “We do certainly see storage, as an example, improving in the [current] quarter… as storage software continues to grow, as well as some of our high-end products.”Among the recent storage product announcements was the addition of SATA drives and low-cost switches for HP’s StorageWorks Modular Smart Array (MSA) midrange systems (see HP Aims to Dazzle SMBs and HP Tailors SANs for SMBs). HP also introduced a hybrid disk technology it calls Fibre Attached Technology Adapted (FATA), which provides a Fibre Channel connection to ATA drives (see EMC and HP Spin Disk and HP Unveils New Disk Products).

The earnings report was the second piece of bad news for HP storage this week. On Monday, a U.S. District Court jury in Massachusetts found that HP is infringing three EMC Corp. (NYSE: EMC) patents. The jury found HP's OpenView Continuous Access Storage Appliance (CASA) product infringes EMC's core patents related to its SRDF and TimeFinder software products, which perform remote and local mirroring functions. It is still too soon to know how this will affect the companies’ products and customers. EMC intends to seek an injunction based on the verdict, while HP is contemplating an appeal.

Fiorina also continues to take a more pessimistic view of 2004 IT spending than most of her storage competitors. On Tuesday, she stuck to the forecast she gave last quarter, which is about half of what others have predicted (see HP Leery of Uptick Talk). For example, EMC CEO Joe Tucci said last month he expects IT spending to rise by 3 to 4 percent this year (see EMC Earnings Up).

“We’ve said pretty consistently that we think IT budgets in the U.S. in the enterprise space are probably going to grow 1 to 2 percent this year,” Fiorina said. “Others may have said something different, but fundamentally that’s where we’ve been.”

— Dave Raffo, Senior Editor, Byte and Switch0