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HP storage sales tank

HP blamed channel and pricing problems for its miserable storage earnings this week; analysts said its biggest problem is execution.

Hewlett Packard Co. blamed its shoddy third-quarter storage sales on the steady decline in disk prices, aggressive discounting in the channel and a badly executed migration to a new SAP order processing system.

The Palo Alto, Calif., company reported total storage revenue for its third quarter of $709 million. Breaking this out, the online storage unit, which includes the midrange Enterprise Virtual Array (EVA) product line and XP high-end arrays, was down 23% year over year and the nearline tape business was down 16%.

Chief Executive Carly Fiorina said satisfactory performance at a number of HP's businesses was overshadowed by "unacceptable execution" at the enterprise servers and storage unit, where third-quarter revenue of $3.4 billion was down 5% from last year.

In an effort to correct the problems, Fiorina announced the resignations of three key executives in the customer solutions group (CSG): Peter Blackmore, executive vice president, with responsibility for all direct sales to the company's enterprise, small and medium-sized business worldwide; Jim Milton, CSG senior vice president and managing director for the Americas region; and Kasper Rorsted, CSG's senior vice president and managing director for the Europe, Middle East and Africa region. The technology solutions group, which is the back-end unit that creates the products, was untouched.

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However, a source close to the company noted that Neal Clapper, who used to run the online storage business, was moved just a few weeks ago to a different part of the company in Europe. "It could be that they will try to say that since the head of online storage already got replaced, there is no need to take anyone out of the storage products group … It's a nice early move by Schultz to protect himself if he saw this coming..." the source said. Bob Schultz is senior vice president and general manager of HP's network storage solutions group.

Most analysts narrowed the storage shortfall down to two key factors: a weakening competitive position in the midrange, most noticeably against EMC's Clariion; and second, product transition effects. HP is planning to announce Monday its EVA 3000, which will compete more directly with EMC's Clariion CX 300 array. And it will also announce a new high-end array, via its OEM relationship with Hitachi Data Systems, in early September.

"Sales of HP's XP high-end arrays, OEMed from Hitachi, likely suffered due to customers holding out until the release of Lightning 3 later this year," said Shebly Seyrafi, storage analyst with Merrill Lynch, in a note to investors.

Dan Renouard, analyst with Robert W. Baird, added that since the merger with Compaq, HP has struggled to execute in its enterprise business. "Selling to enterprise customers is complex: They've tried going more direct, which creates issues for the channel; they've also let go of lots and lots of field people, brought storage under the server banner, and the combination of all these shifts, while losing good management, have combined to put HP at a product disadvantage and go-to-market disadvantage, which naturally leads to share loss." Renouard said he's also heard that HP is slow to react to point pricing deals. In other words, "HP is bringing a knife to a gun fight," he said.

Fiorina claimed that the server and storage business will return to profitability in the fourth quarter, but very few analysts in the industry have confidence in HP's ability to execute on this.

Steve Milunovich, technology analyst at Merrill Lynch said in a note to investors Friday morning that the soft economy was perhaps 20% of HP's problem. "The big issue was execution. Although the SAP transition and channel issues could be termed one-time, investors and customers have to be concerned about HP's inconsistency. Announced management changes likely don't solve the problem."

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