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HP Warns of Weak Q3

Due to poor execution in its enterprise server and storage business, HP warned that earnings for the third quarter would be 24 cents per share, 7 cents lower than analysts' consensus.

In a surprise conference call Thursday to discuss the news, HP Chairman and CEO Carly Fiorina said that, although the company expects to post third-quarter revenue of $18.9 billion, up 9 percent from 2003, a couple of key businesses suffered major losses.

Equally surprising was the management shakeup that followed. In a memo to employees and obtained by internetnews.com, Fiorina said three major executives were shown the door including Peter Blackmore, HP's executive vice president of the Customer Solutions Group (CSG), which covers the company's direct sales to enterprise, small and medium-size business and public sector customers worldwide.

The memo said Mike Winkler, executive vice president, Global Business Units, would take over for Blackmore in addition to his current position. Blackmore had been called to task in May as part of a management realignment. The move put the former Enterprise Systems Group leader in charge of one of HP's less profitable market segments.

Specifically, HP's enterprise server and storage segments reported revenue of $3.4 billion, down 5 percent year-over-year. This included a major quarterly operating loss of $208 million, down from a loss of $20 million in the same period last year. Servers and storage comprise half of the company's Technology Solutions Group, which is headed by Ann Livermore, and also includes software and services.

Also getting pink slips today were Jim Milton, a CSG senior vice president and managing director for the Americas region and Kasper Rorsted, a CSG senior vice president and managing director for the Europe, Middle East and Africa (EMEA). Jack Novia and Bernard Meric are replacing the two men respectively.

"We thank Peter, Jim and Kasper for their years of service and dedication. I look forward to working with our new CSG leaders," Fiorina said.

The news rattled HP's stock price, which was down $3.02 to $16.50 in early-morning trading.

The company's business critical server revenue plummeted a hefty 8 percent to $828 million, with sales in its Alpha and NonStop server lines down 32 percent and 25 percent, respectively.

Meanwhile, storage revenue for the third quarter fell 15 percent year-over-year to $709 million, with the online storage division, including EVA and XP enterprise storage, suffering the largest loss at 23 percent. Nearline storage, which includes the tape library business, lapsed 16 percent year-over-year.

Fiorina outlined several factors that stymied the growth of the server and storage business. For one, a migration to a new order processing and supply chain system in the United States was more disruptive than planned.

"Not only did we lose transactional sales, we were forced to take additional steps to ensure delivery, including fulfilling certain direct orders via the channel and expediting orders via air shipment, all of which had an impact on gross margin," Fiorina said.

In Europe, Fiorina said results were impacted by channel management issues, including channel compensation, overly aggressive discounting and the transition to a centralized claims process. Ultimately, normal business acceleration toward quarter's end was muted.

The estimates for the enterprise servers and storage segments are a blight on an otherwise strong quarter for HP, which posted an operating profit of $846 million. Overall the Technology Solutions Group reported revenue of $7 billion, up 4 percent from the same period a year ago.

HP's personal systems, imaging and printing and software and services, performed up to par, Fiorina said. Revenue in personal systems grew 19 percent year-over-year, while imaging and printing rose 8 percent. HP services and software grew 12 percent and 17 percent, respectively.

On a total company basis, third-quarter revenue grew 5 percent.

Fiorina promised HP would improve its enterprise server and storage businesses by the fourth quarter, estimating revenue will range from $21 billion to $21.5 billion, with non-GAAP EPS between 35 cents and 39 cents. HP expects to report full earnings for the third quarter on August 18.