Data centre demand boosts HP and Cisco

Networking equipment giant Cisco has diversified in all manner of directions in recent years, but perhaps the boldest was its entry last year into the data centre infrastructure market.

The launch of its Universal Computing System, a brand new platform for server, storage and networking technology, was especially brazen as it was not only engineered from scratch but also placed Cisco in direct competition with many of its closest partners.

In November 2010, Cisco’s financial figures suggested that, so far at least, the gamble is paying off. In the three months ending 31 October 2010, sales of the UCS product family jumped 550% compared with the same period of the previous year (when, admittedly, the product line had only just been released). The number of customers using UCS, the company said, has increased from 900 to 1,700 and then to 2,800 in the last three consecutive quarters.

These customers are still mostly using the UCS platform in pilot projects, Cisco CEO John Chambers revealed in a conference call with financial analysts. He added, however, that the company is “starting to see many of these systems now going into production. Over the next several quarters, we hope to start seeing our first large orders for major data centre implementations.”

That in itself reveals that companies, be they IT service providers or enterprise organisations, are investing in new data centre infrastructure again. Indeed, Cisco’s data centre division grew sales by 59% year-on-year – its fastest-growing segment.

The VCE Alliance – a concordat between Cisco, VMware and EMC to provide standardised and pre-integrated virtual server units called VBlocks – seems to have been less of a runaway success, having attracted just 62 customers since its launch in late 2009.

More worrying for Cisco, though, was a precipitous drop in its public sector business. Orders from US government organisations, for example, fell 25% year-on-year; from state governments in particular, orders dropped 48% from the previous quarter. “We saw similar challenges in our Japanese government business as well as orders from certain central governments in Europe,” said Chambers. “We believe that the public sector business will continue to be challenging for at least several quarters.”

Cisco’s combined revenues for the quarter were $10.75 billion, up 19.2% from the same quarter of the previous year. Net income was up 8% to $1.9 billion. But in his closing remarks, Chambers implied a realisation that Cisco’s future performance is at the mercy of economic and political winds: the company is very confident, he said, “in terms of what we can control or influence”.

Familiar face

Data centre technologies were also the organic growth driver for Hewlett-Packard. In the three months ending 31 October 2010, sales by the company’s enterprise storage and servers segment were $5.3 billion, up 25% from the same period of the previous year.

Aside from this, growth was rather modest. The services division – HP’s largest – was particularly moribund; it’s sales rose by just 0.4% to $9 billion. This almost certainly reflects slowing government IT spend; the company is, for example, the UK government’s largest IT services supplier.

Overall, HP’s revenues rose 8% year-on-year to $33.3 billion, thanks both to the storage and server sales and to the acquisition of networking vendor 3Com in April 2010, which meant that HP’s networking sales rose 227% year-on-year.

As always, the Imaging and Printing division was HP’s most profitable. The unit’s operating profit was $1.2 billion, roughly half of the company’s $2.5 billion net earnings.

It was former SAP CEO Leo Apotheker’s first set of financial results to announce as the chief executive of HP. He took the opportunity to reflect on what he considered to be the company’s key strength.

“The great majority [of customers] are telling me that they want to do more business with HP,” he said. “But I am also hearing that we need to make it easier for customers to work with [us].”

HP’s appointment of Apotheker – a veteran of the enterprise applications business – was seen by many as an sign that the company was preparing to reinvigorate its software business, which grew by just 1% to $974 million in the latest quarter.

His remarks to investment analysts cemented that impression. “We need to enhance our software [intellectual property] across the company to create more differentiation with our products,” Apotheker said. “This includes strengthening our core software business segment as well as adding value-added IP and services that cut across other segments.”

Apotheker added that he considers HP’s presence in both enterprise and consumer markets to be the key to its future success. “We have a secret formula, a secret source that we can actually put to our advantage,” Apotheker argued in a conference call with investment analysts. “We’re the only company in this industry that is equally good on the consumer side and on the enterprise side. If we manage… to leverage the rapid innovation cycles that occur on the consumer side back into the enterprise, I think that will give us an immense competitive advantage.”

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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