Earnings per share were at 21 cents, a whopping 14 cents below the consensus view, while revenue, at $14.07 billion, was above the forecast by about a half-billion dollars.

During a conference call with analysts that wrapped up just a little while ago, Dell management struck a tone of sticking to its strategic guns. With the PC market contracting fast, it has gotten selectively aggressive on pricing in order to try and take share away from rivals like Hewlett-Packard and Lenovo. At the same time, the results show growth in expenses like research and development spending that aren’t exactly helping gross margins.

In short, Dell is starting to act a lot more like the privately held company it expects to be before the summer is over, accountable only to its owners.

In their questions, analysts sought to tease out what details they could about the effect of the proposed go-private transaction on things like employee retention and relationships with key customers. CFO Brian Gladden and head of investor relations Rob Williams shot those questions down.

Here’s a summary of the substance of the conference call (all times are Pacific):

1:46 pm: On hold waiting for the conference call to begin with what sounds like some Vivaldi playing in the background.

And now things are getting under way.

Standard conference call boilerplate from head of investor relations Rob Williams.

Brian Gladden is speaking. “We continue to invest in strategic capabilities.” He’s talking about the acquisition of Entratius, which closed last week.

Gross margin was down 40 basis points sequentially.

“We continue to face a competitive pricing environment … and this has affected our profitability.”

Selling and general costs were up 4 percent.

R&D spending is up 33 percent.

Gladden: There were almost $90 million worth of expenses related to the go-private transaction that were excluded from the non-GAAP figures.

1:54 pm: Tom Sweet is talking about business segments. Here comes the news on server sales that Michael Dell said was going so well.

Servers, Networking and Peripherals saw sales grow by about 10 percent, but sales of storage fell about 10 percent.

Sweet: “Dell powers four out of the top five search engines and 75 percent of the top social media sites worldwide.”

Sweet is covering a few customer wins. And now he’s on to software. Revenue was $295 million and had an operating loss of $85 million. “We remain confident that the Quest acquisition (which was $2.4 billion) will be accretive by FY 2015.

Sweet is talking about End User Computing, a.k.a. the PC segment, and says the environment continues to be competitive. The plan is to try and cut $1 billion out of operating costs by 2015. But customers are “diverting spending to alternative mobile solutions.” Does he mean iPads? Yup.

2:01 pm: Sweet is talking about a big PC win with Marsh and McClennan that has 55,000 seats. “We won despite a key competitor that was a longtime incumbent.” Who? HP maybe?

Question and Answer session is getting underway. First is Katy Huberty from Morgan Stanley. “Can you step back and say if the margin decline is what you expected when you rolled out the more aggressive pricing strategy?”

Gladden: We’ve been talking about this for a few quarters, the need to adjust pricing. There are parts of the business where we are beginning to see some elasticity. Demand has been weaker than expected. These are accounts that we’re gaining that we feel good about their profitability. We feel for the long term we think it’s the right thing to do. If you look at the share dynamics, we did improve our share position in a market that is pretty tough.

A question from Tony Sacconaghi of Sanford Bernstein: Is there a minimum level of profitability that you are willing to sustain in an effort to hold or gain share? Also a question about cost-cutting.

Gladden: Without providing details of specific initiatives, we have continued to take cost out of the business. We are choosing to reinvest those dollars in sales and R&D. I think those things are going on concurrently. (Essentially what he’s saying is that Dell is acting like it’s a private company already.)

As Gladden is speaking I’m looking at the slide presentation. The worst geographically was Asia-Pacific, where sales fell 12 percent year on year. Ouch. Sales in the Americas were up slightly. The BRIC countries fell 17 percent, led by China which fell 24 percent. Super ouch.

Maynard Um: Are customers holding out given the go-private transaction?

Gladden: The customer base has been very supportive of the company. For the conversations I have been a part of they have resulted in many opportunities for the company.

FYI Dell share price update: In after-hours, Dell is trading at $13.37, which is 28 cents below the $13.65 that Michael Dell and Silver Lake have offered shareholders to take it private.

2:11 pm: Question from Steve Milunovich from UBS. He’s asking about changes in sales model on PCs that’s expected as Dell goes private.

Gladden: I wouldn’t say our strategy has changed at all. We’ve adjusted our pricing accordingly and expanded our offerings across the portfolio. This is not a new strategy or business model for us. It’s adjusting tactics given where the market is going.

Question from Credit Suisse: In terms of pursuit of new PC customers, have you put the investments in that you need to or is there more effort to come through?

Gladden: Basically says the strategy hasn’t changed.

Question from Deutsche Bank, asking about servers and the storage business. Servers are good but he says storage doesn’t seem to be getting good attach rates.

Gladden: With servers, we’re winning in the marketing. And when you look at density-optimized servers, we’re winning. We feel good about the server business. You don’t see us trading price for growth there.

About storage. We feel like that business is growing with the market. It’s shrinking with the market. That is not what we’d like to see, obviously. We’re working on it. We’ve added commercial resources over the the last 18 months. We feel positioned to out perform the market.

Question from Keith Bachmann at BMO: How might the M&A strategy differ if the go-private transaction happens? Also about employee retention during the transaction.

Rob Williams: No answer to the first question.

Gladden: Attrition has been about normal for us.

Another question: Does the PC market get softer or better over the next four to six quarters?

Gladden: There are multiple dynamics playing out. There’s a lot driving a refresh cycle. We see improvements in corporate and SMB segments. But we see consumer and government, not so good. Windows 8 has not been the catalyst to growth that we hoped it would be. (That’s a big admission.) You look at recent external data, and we would expect to see over the next few quarters declines in PC demand. We’re trying to run the business based on that.

2:22 pm: Can you update us on the peformance of Quest in the quarter?

Gladden: It’s progressing as expected. We expect it to be accretive in the first fiscal quarter of next year. (Or a year from now.)

Question from Bill Shope of Goldman Sachs, about the PC pricing reductions: Which accounts are the ones that get the discounts? Where do you draw the line on profit vs. market share?

Gladden: We know where long-term strategic accounts are. In many cases those are accounts we’ve had before and have walked away from. I think we’ve been selective. There are clearly some unit volume opportunities where we can sell a lot of units, but they don’t create any profit benefits.

2:29 pm: One last question, this one on support and deployment revenue, which was up.

Tom Sweet: We’re happy with the attach rate there. The team has seen some good things with support products. We’ve been able to keep the attach rate relatively high. Despite downward pressure, it will be a good business.

Gladden: We think that’s a good business on the enterprise side, too.

And that ends the call. Thanks for tuning in!

Earnings on a per-share basis were 21 cents on sales of $14.07 billion. That’s versus a pre-leak consensus of 35 cents on sales of $13.5 billion. Sales were obviously better than expected, but profits were substantially lower.

On a year-over-year basis, sales fell 2 percent. Profits on a non-GAAP basis fell 51 percent. The fall was led by end-user-computing, Dell’s mainstream PC business. Sales there fell 9 percent, and the unit’s operating margin fell 65 percent. That’s where the pain point is.

Enterprise sales grew by about 10 percent to $3.1 billion. Services revenue grew to about 2 percent. Software sales were $295 million but that unit ran at an operating loss.

Here’s Dell’s original announcement:

Dell Reports Fiscal Year 2014 First Quarter Financial Results

Revenue of $14.1 billion
Enterprise Solutions, Services and Software revenue up 12 percent
GAAP earnings of $0.07 per share; non-GAAP earnings of $0.21 per share

ROUND ROCK, Texas–(BUSINESS WIRE)–

Dell today announced fiscal 2014 first quarter results, with revenue of $14.1 billion, as the company grew revenue from Enterprise Solutions, Services and Software 12 percent year over year to $5.5 billion, or 8 percent growth, excluding the acquisition of Quest Software. Pricing adjustments that affected gross margins and continued acquisition-related costs in the quarter resulted in GAAP earnings of $0.07 per share and non-GAAP earnings of $0.21 per share.

“We made progress in building our enterprise solutions capabilities in the first quarter and are confident in our strategy to be the leading provider of end-to-end scalable solutions,” said Brian Gladden, Dell chief financial officer. “In addition, we have taken actions to improve our competitive position in key areas of the business, especially in end-user computing, and it has affected profitability. We’ll also continue to make important investments to support our strategy and drive long-term profitability.”

Results

Revenue in the quarter was $14.1 billion, a 2 percent decrease from the previous year.

GAAP operating income for the quarter was $226 million, or 1.6 percent of revenue. Non-GAAP operating income was $590 million, or 4.2 percent of revenue.

GAAP earnings per share in the quarter was 7 cents, down 81 percent from the previous year; non-GAAP EPS was 21 cents, down 51 percent.

Cash used in operations in the quarter was $39 million. On a trailing, 12-month basis, Dell has generated $3.4 billion in cash flow. Dell ended the quarter with $13.2 billion in cash and investments.

 
Information about Dell’s use of non-GAAP financial information is provided under “Non-GAAP Financial Measures” below. Non-GAAP financial information excludes amortization of purchased intangibles, severance and facility-actions, acquisition-related charges, costs incurred in Fiscal 2014 related to Dell’s proposed merger, and other items. All comparisons in this press release are year over year unless otherwise noted.

Operating Segments Summary:
As previously announced, Dell has realigned its global operating segments to its end-to-end solutions portfolio in the Enterprise Solutions Group, Dell Services, Dell Software Group, and End User Computing Group.

Enterprise Solutions Group revenue was $3.1 billion, a 10 percent increase. Operating income for the quarter was $136 million, a 71 percent increase. Dell server and networking revenue increased 16 percent as the company gained share in the calendar first quarter. Dell networking continued to deliver strong growth, with a 24 percent revenue increase, including a 46 percent growth in the company’s Force10 business. Dell storage revenue declined 10 percent.

Dell Services revenue grew 2 percent to $2.1 billion driven by an 11 percent increase in revenue for infrastructure, cloud and security services. Support and deployment revenue increased 2 percent and applications and business process services declined 15 percent. Operating income was $370 million, a 10 percent increase.

Dell Software revenue was $295 million, resulting in an operating loss. Dell enhanced its software capabilities during the quarter, investing in additional sales capability and research and development. Consistent with the company’s business strategy when it acquired Quest Software, this business is on track to be accretive to earnings in the first quarter of fiscal year 2015.

End User Computing revenue was $8.9 billion in the quarter, a 9 percent decrease. Operating income for the quarter was $224 million, a 65 percent decrease. Dell desktop and thin-client revenue declined 2 percent, mobility revenue declined 16 percent, and software from third parties and peripherals revenue declined 6 percent.

Company Outlook:
Given the company’s announcement on Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for the fiscal 2014 second quarter.

First off, Dell has moved up the date of its report. Originally set for May 21, the results will come after markets close in New York today and a conference call with analysts will start at 1:45 pm PT.

The reason for the change likely has a lot to do with the fact that Dell is probably going to report another miss on its consensus numbers. Analysts polled by Thomson Financial expect Dell to report a 35 cent per-share profit on sales of $13.5 billion. But as The Wall Street Journal reported Monday, Dell expects to announce profits of about 20 cents on $14 billion in sales, a huge bottom-line miss.

It’s difficult to expect much else. Despite all the efforts made in recent years to nudge Dell in the direction of becoming a more enterprise-focused company via acquisitions in the areas of cloud computing, software and services, Dell still derives about 70 percent of its sales, give or take, from consumer or commercial PCs or PC-related accessories like monitors. And as we all know, PC sales are plummeting at a historic rate.

That’s not to say there aren’t potential bright spots. CEO Michael Dell has been crowing about the company’s success in server sales and has described market share losses by rival Hewlett-Packard as “staggering.”

Then, of course, there’s the ongoing saga of Dell’s quest to go private in a $24.4 billion buyout transaction with Silver Lake Partners. Carl Icahn and Southeastern Management, which between them control about 13 percent of Dell shares, are opposed and this week made their own counter-offer, and then nominated a slate of directors to replace Dell’s current board. Icahn has made no secret that he’d like to send Michael Dell packing. The special committee of Dell’s board overseeing the buyout process has asked the Icahn camp for more information.

Certainly there will be questions for management about all of it, though the answers from Dell management will probably be some variation of “no comment.”

Taking to CNBC’s airwaves in another one of his candid phoned-in afternoon rants (the last was an epic 28-minute on-air slugfest with hedge fund investor Bill Ackman in January) with host Scott Wapner during the closing half hour or so of the network’s “Fast Money Halftime Report” show, Icahn revealed that on Monday he will nominate a slate of 12 new directors and, if successful, he’ll see to it that Michael Dell doesn’t remain CEO. “He will not be running the company,” Icahn said.

“It’s not that I have anything against [Michael] Dell. I’m sure he’s a very nice guy,” Icahn said. “But it’s a new world out there.”

Icahn has had a busy day on the Dell front. First he reported in a filing with the U.S. Securities and Exchange Commission that his stake in Dell amounts to 4.52 percent. He also joined Southeastern Asset Management, Dell’s largest outside shareholder, in making a joint bid for the company. (The Wall Street Journal’s Moneybeat has the full text of the joint Icahn-Southeastern letter to Dell’s board here.)

The special committee of Dell’s board has in the last several minutes issued a statement saying it is “carefully reviewing” the Icahn-Southeastern offer.

“Mr. Icahn and Southeastern have outlined a potential leveraged recapitalization transaction that they want the Dell Board either to recommend at this time or to consider if the existing going-private transaction is rejected by Dell shareholders. They have also proposed replacing the Board with a slate of new directors who they say would approve such a transaction. Consistent with the Special Committee’s goal of achieving the best possible outcome for all shareholders, we and our advisors are carefully reviewing the potential transaction to assess the potential risks and rewards to the public shareholders.”

In his televised jeremiad, Icahn blasted Dell’s board and said that Dell shareholders will “literally get screwed” by the $24.4 billion Michael Dell/Silver Lake offer to take the company private in a leveraged buyout. His offer, he said, would leave existing shareholders with a publicly traded stub that would allow them to make more money than the $13.65 per share Dell and Silver Lake have offered.

Below, two video highlights. The second one focuses more on Wapner’s fascination with Icahn’s opinion of the legendary Wall Street short-seller Jim Chanos, who has previously publicly stated that he has been shorting Dell shares. “I’ve made a lot of money going against Chanos,” Icahn said.

Of course it goes without saying that all the attention on Dell caused the shares to trade upward during the half hour or so that Icahn was on CNBC. Ahead of 1 pm ET, Dell shares were trading as high as $13.51, or up more than 1 percent. After Icahn hung up (and apparently called BloombergTV to make a similar on-air speech), its price settled back down. Here’s a screen grab I took of Dell’s share price via Yahoo Finance.

On Friday afternoon, Dell gave an interview to the trade publication CRN (which used to be called Computer Reseller News) crowing about his company’s apparent share gains in the market for servers.

What got him excited was preliminary data (as in, not yet published) from the market research firm IDC, which followed similar findings from another research firm, Gartner (again, not yet published), that supposedly shows healthy gains for Dell and big losses at HP.

According to the numbers Dell shared with CRN, IDC found Dell — No. 2 in the worldwide server market — to have grown its share of the server market to nearly 28 percent, while HP’s fell from north of 35 percent a year to slightly below 31 percent. “HP is losing share at a staggering rate, and they are losing it to Dell,” Dell proclaimed.

HP, which had led the segment for the better part of two decades, didn’t respond to Dell’s claims. But it did respond a day earlier, after Dell enterprise chief Marius Haas gave a similar interview — again to CRN — claiming similar data from Gartner. “One quarter does not a trend make. … 17 years is a trend,” retorted Jim Ganthier, a marketing exec in HP’s server group.

Dell hasn’t bothered to wait for either research firm to finalize and publish their data, and I’ve asked both firms to comment on that. I’m no expert in the processes these firms follow, but from what I understand, execs at companies like Dell, HP and IBM see these “preliminary” figures before they get published in order to give the company a chance to dispute them if they vary from what’s really going on. When Gartner and IDC get around to publishing press releases, expect Dell to make a second push on this topic, and maybe give more interviews.

Dell naturally has an urge to pounce on HP and score a few punches. HP has been using the occasion of Dell’s $24.4 billion leveraged-buyout plan to create uncertainty among Dell customers. Way back on Feb. 5, when the buyout plan was first floated, HP issued a statement saying, “Leveraged buyouts tend to leave existing customers and innovation at the curb. We believe Dell’s customers will now be eager to explore alternatives, and HP plans to take full advantage of that opportunity.”

With IBM said to be in on-again, off-again talks with China’s Lenovo to sell its industry-standard server business, and Dell going private, HP is arguing that it is the one major vendor not engaged in a significant corporate shake-up, and thus able to focus most on its customers’ needs. Indeed, HP’s Dave Donatelli led a major Webcast with HP partners last week, touting that very message.

Neither company’s shares are really responding to any of the trash-talking today. HP shares are up slightly this morning to $20.76 a share, while Dell shares are also up a little to $13.35, or about 30 cents below the $13.65 buyout price that Michael Dell and private-equity firm Silver Lake have offered to take the company private.

As of 3:05 pm ET today, Fusion shares were trading at $19.89, up $3.26 (or 19.6 percent) from a $16.63 closing price Wednesday. For one thing, the company reported quarterly results yesterday, and gave forward guidance for the current quarter that was better than anyone expected.

Another thing? There’s a new Facebook data center going up in Iowa. And as everyone who follows Fusion-io knows, Facebook and Apple are its marquee customers. A new data center means that a lot of new Fusion-io products are selling.

As CEO David Flynn pointed out in an interview this morning, that can be a blessing and a bit of a curse. Earlier this year, Facebook and Apple trimmed orders and Fusion was forced to trim its outlook. Now, with Facebook building again on a site that’s big enough to accommodate at least two more facilities just like it, there’s a brighter outlook. But if you take out the up-and-down side of Fusion’s business that caters to Apple and Facebook growth, Flynn said, there has been a nice, steady, predictable ramp.

There are also new customers to report: Box, the fast-growing enterprise cloud services company, has started adding Fusion-io products to its servers. So has music service Spotify.

Then there’s the matter of the $119 million acquisition of NexGen, a Louisville-based company that specializes in taking traditional hard-drive-based storage products aimed at mid-range companies and combining them with Fusion-io’s flash-based technology. The combination gives Fusion access to a base of customers it wasn’t previously reaching. “We started out reaching the companies at the top of the pyramid, and the fact is the size of the market opportunity in the middle market is bigger,” Flynn said.

The deal has Fusion paying $114 million in cash and $5 million in stock. It’s Fusion’s second acquisition this year. Last month, it acquired ID7, a British software firm.

As if you needed another indicator about how much the old Wintel world of PCs has flipped in the last couple of years, take a look at the earnings results of the British chip designer ARM, which just reported quarterly earnings this morning.

Sales rose by 29 percent year on year to north of 170 million pounds (or $260 million), which was better than expected. Earnings on a per-share basis were five pence versus the expected four pence, amounting to a beat of a penny per share. Its shares are rising by 9 percent both in the U.K. and on the Nasdaq in the U.S.

ARM, you’ll recall, is the company behind the designs that go into building the chips that land in most smartphones and tablets. Rather than make the chips, ARM licenses its blueprints to companies like Qualcomm, Broadcom and Nvidia, which then make their own chips. And since phones and tablets are growing a lot faster than traditional PCs (come to think of it, PCs actually aren’t growing at all), ARM is looking a lot healthier than traditional chip companies like Intel and Advanced Micro Devices. Here’s a pretty good indicator: Royalty payments for processors rose in the quarter by 33 percent versus a processor industry that’s up about 2 percent.

ARM is quickly turning out to be the company to watch in the chip space. Chips sporting ARM designs are everywhere these days, and there has been a lot of chatter of late about them heading into the data center.

Hewlett-Packard offers ARM processors as an option on its radical new server design, called Project Moonshot. Dell offers ARM-based servers, too, and there are even more plans for ARM chips in servers. I talked with CEO Warren East about this last year. (East is retiring this summer, by the way, and Simon Segars will be ARM’s new CEO, starting in July.)

The basic argument that ARM makes coming in is that its chips are good at managing power consumption, in part because they were designed from the beginning for mobile applications. And power consumption continues to be a huge problem, especially in data centers where thousands of servers are crowded together in one place.

Intel, the king of the chip world, has responded and created its own line of low-power chips called Atom. And as we learned from Mike Bell, head of Intel’s mobile chip business at D: Dive Into Mobile last week, it has gotten off to a slow start but is starting to get a little traction in mobile.

Another version of Atom, announced the week before last, will also defend Intel’s interests in the server space. But keep an eye on this, because there’s eventually going to be a rumble.

That’s the conclusion of Chris Whitmore, an analyst with Deutsche Bank Securities, in the wake of yesterday’s earnings report. “IBM hasn’t missed consensus earnings expectations for eight years which raises the specter of increased macro risk and substantially weaker IT hardware spending,” he wrote in a note to clients today.

IBM is better than most at managing sales that turn south in one part of its business, but still able to make its numbers, he writes. That it wasn’t able to do so this quarter “raises a red flag” for other tech companies, especially those that sell a lot of hardware, including Hewlett-Packard, Dell, NetApp and EMC. “The IBM miss is a decidedly negative read through for the entire IT hardware segment and we are incrementally more cautious on the sector,” Whitmore wrote.

Expect a lot of attention on IT spending trends in the coming weeks, as other large IT companies get ready to report their results. The next big indicator will be when EMC reports quarterly results next week. HP, Dell and NetApp all report results in mid-May.

At issue is IBM’s business selling so-called x86 servers, the low-price workhorses of many corporate and cloud-based data centers. An exact sale price isn’t known, but one of the people said the deal could be worth billions of dollars.

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Intel shares have traded lower since last Thursday, when the market research firms IDC and Gartner said they had tracked one of the largest year-on-year declines in sales of personal computers since records have been kept. Intel is the largest supplier of microprocessors to PC manufacturers like Hewlett-Packard, Dell and Apple, and it’s hard to see how much good news it can possibly bring to the table today.

Analysts are expecting Intel to report a profit of 41 cents per share on sales of $12.6 billion, and missing either would be seen as more or less proving that the PC market is in a state of permanent decline. So would a weak outlook for the current quarter, for which analysts currently expect earnings of 40 cents on $12.9 billion in sales.

There are other aspects to Intel’s business. It has a healthy data center business selling chips for use in servers, but out of more than $53 billion in sales last year, $34 billion, or more than 61 percent, was in its “client,” or PC, unit, while the data center group accounted for about $10.7 billion.

In the past, Intel executives have quarreled with the analyst firms, and said it was seeing more promising conditions in emerging markets. Indeed, in prior years there has been a disconnect between the dour pronouncements of Gartner and IDC and the peppier market conditions that Intel would later describe in its financial results in places like Brazil, Indonesia and Russia. In more recent quarters, the differences between their views have narrowed.

Aside from PCs, Intel has some new ideas that it hopes will kick its data center business into a higher gear. And it certainly has higher hopes about selling more chips for use in phones and tablets, but as yet they’re only hopes. It also plans to launch a TV product later this year.

Aside from the numbers, expect some questions — and maybe even some answers, but probably nothing conclusive yet — about the search for a replacement for CEO Paul Otellini. The smart money says the choice will be an internal one (here’s a rundown on the contenders), though there’s a slim chance that Intel’s board might be in the mood to surprise everyone and name an outsider. But don’t bet any money you can’t afford to lose on that.

In comments at the Intel Developer Forum in Beijing overnight, Diane Bryant, senior vice president and head of the Datacenter and Connected Systems Group, described a rethink of how data centers might be designed. Currently, individual servers, each with its own computing and storage, are being packed tightly together in a rack, and in turn packed into a room with other similar racks.

Intel sees a world where all the computing and storage portions are separated. CPUs would be grouped together so they could be cooled together. They would in turn be linked to storage infrastructure by screaming-fast optical connections running as fast as 100 gigabits per second.

Eventually, Intel sees everything being separated into its own section of the rack: CPU, memory, storage and power. The point is that you’ll be able to upgrade one — swap out older memory modules for newer ones, or upgrade the CPUs, or replace a bad hard drive — without interfering with the operation of any of the other parts.

Intel’s play, Bryant said, is to offer a reference design — essentially a basic recipe for building the concept — to the big server manufacturers. And at least some portions of this concept are already operating in China. Intel has been working with Web commerce giant Alibaba, Web search concern Baidu, Chinese Internet company Tencent and China Telecom on something they call Project Scorpio. The idea is to centralize all the cooling and fans within the rack, and to demonstrate that you can save on operating costs.

There were new Intel chips disclosed, too. A chip code-named Avoton is due in the second half of this year. It’s a version of Intel’s lightweight Atom processor, aimed at small servers — not unlike HP’s Project Moonshot — that will be built on Intel’s latest 22-nanometer manufacturing process, and with a new design. In Intel’s recent “tick-tock” parlance, where it delivers a new design — a tick — then shrinks it with an new smaller manufacturing technology — a tock — this is effectively both.

Another chip, code-named Rangeley and also due in the second half of the year, is a 22-nanometer variant of Atom that will be aimed at networking devices, routers, switches and whatnot.

There were also three versions of the Xeon chip discussed. The next E3 will get some new tricks to support video analytics workloads. The next Xeon E5 will move to the 22-nanometer manufacturing process (that’s a tock), and will be available in the fall. Finally, a new Xeon E7 will be available in the fourth quarter. Its newest trick is that it can address three times the memory of its predecessor — up to 12 terabytes.

Reserving judgment, two analysts wondered in notes to clients today if even the most optimistic outcome for Moonshot is enough to get HP on track.

Moonshot is a “step in the right direction,” wrote Shaw Wu of Sterne Agee, but he wondered if large Web companies could be persuaded to buy from HP rather than have their own custom servers built for them. “But we are not sure if big customers including Amazon, Google, Facebook, and Twitter would switch from their current model where they procure customized server and storage components from Quanta and Compal.”

And even if successful, Moonshot might not have a big enough impact to nudge HP sales upward, Wu wrote, noting that servers account for roughly 25 percent of sales, versus PCs and printers, both in decline, which combined account for about half. “We believe the company’s turnaround remains tough as it remains to be seen whether its enterprise efforts are enough to offset continued challenges in its PC, printer, and services businesses,” he wrote.

It’s also going to take a while for revenue from Moonshot sales to start showing up in HP’s results, says Brian Marshall of ISI. “While we do not anticipate meaningful revenue from Moonshot in the next few quarters, we see it as a positive step towards maintaining HPQ’s number one share position in servers longer-term.”

Not all voices were so reserved. Patrick Moorhead, an analyst with Moor Insights and Strategy who was on stage with HP execs at the launch today, said the most interesting thing about the Moonshot line is not the fact that it uses less energy or takes up less space than conventional servers, but that it works with all sorts of different chips to attack the computing job at hand. Yes, it supports conventional CPU chips like Intel’s Atom and ARM-based server chips like those from Calxeda, but also GPU chips from Nvidia; digital signal processor chips, like those made by Texas Instruments; and field-programmable gate arrays, the software-defined chips turned out by companies like Altera and Xilinx. That, he says, gives it “the potential to change the game in scale-out data centers.”

Today is the day HP will formally unveil a product upon which a lot of its hopes for transformation and a return to health have been placed. It’s called Project Moonshot, and HP has been talking about it for about 18 months.

Basically, it’s a server, a very small server that consumes very little energy. During a conversation earlier this year, Dave Donatelli, HP’s executive VP and head of its enterprise, showed me one. Smaller than a typical hardcover book, it consumes 89 percent less energy to operate, and takes up 94 percent less space than a typical server. And, when packed into a large rack with many more servers like it, the amount of computing power that can be harnessed in one relatively small place is pretty impressive.

It’s also highly customizable, in a nearly endless series of mix-and-match combinations: It supports Intel’s Atom line of small and light microprocessors, as well as new up-and-coming server chips based on designs from the British firm ARM. It can also support graphics processing units from companies like Nvidia, as well as standard hard drives or flash-memory based solid-state storage.

HP’s argument to the marketplace is that Moonshot is unique. In a world where companies maintain data centers either for their own operations or as a means of reselling cloud computing capacity, HP’s hope is that the appeal of lower operating costs over time — energy consumption is a big one — will appeal to customers looking to swap out older machines.

And by at least one simple metric, it is. HP’s rivals, including Dell, IBM and Oracle, have nothing quite like it. That doesn’t mean they couldn’t. It is increasingly popular — companies like Google and Facebook do a lot of this — for a company to assemble their own servers from off-the-shelf components. Indeed, chipmaker Intel will be discussing new reference designs — essentially a basic blueprint — for what it calls “micro servers,” based on new versions of its Atom processors, later this week.

The message of Moonshot is also larger. It’s a signal from CEO Meg Whitman that HP can still launch important, innovative products that are different from anything else on the market. That’s a key message, given the tremendous difficulty the company has found itself in over the last few years. Indeed, just last week, Chairman Ray Lane stepped down from that role, and two other directors resigned in response to a proxy campaign by shareholders unhappy with the botched 2011 acquisition of the British software firm Autonomy.

A successful product launch will help shift the HP narrative away from recurring boardroom and executive office dramas, toward the day-to-day business of being the world’s largest technology company. And that’s just as important as the product itself. The sight of HP experiencing a win in a key market segment will go a long way toward making it look as though the longed-for turnaround — one that seemed unthinkable only months ago — is really getting under way.

The software giant’s chief executive on Tuesday unveiled a set of midrange and high-end server systems, powered by a faster version of the Sparc microprocessor line invented by Sun. Oracle said the new systems are much speedier in running an array of applications, including Oracle databases and Java software, and are up to ten times faster than the similarly priced Oracle system it replaces.

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Director Marc Andreessen got a 69.77 percent yes vote. John Hammergren had the smallest margin, receiving a vote of 53.91 percent in favor of his remaining on the board. Chairman Ray Lane got 58.88 percent of yes votes. G. Kennedy Thompson received a 55.15 percent vote in favor of his remaining on the board.

As proxy votes go this is about as close as you can come without actually removing a director. If nothing else, it’s hard for HP’s board not to have received the message loud and clear that shareholders were sending about the Autonomy deal and other difficulties the company has faced.

Here are some highlights from the day’s events.

1:59 pm: So it’s nearly 2 pm here in Mountain View, Calif., and we’re waiting for HP’s shareholder meeting to get under way.

Still waiting. The light FM jazz just stopped playing and now the audience is quiet. Aaaand just like that, onstage there’s Meg Whitman, Ray Lane, CFO Cathie Lesjak, chief legal counsel John Schultz and I think Rajiv Gupta from the board of directors.

Actually it’s not Rajiv Gupta, but a deputy general counsel whose name I don’t know.

John Schultz is speaking and is asking shareholders to observe meeting rules. He’s talking about the three shareholder proposals. Those who wish to speak in support or against the proposals can do so for only about five minutes.

More formalities to get the meeting going. A quorum is declared present. And the meeting can officially get started.

Now the slate of directors is up. All 11 directors are up for reelection to the board.

The second order of business is to re-appoint Ernst and Young as HP’s auditor. There are some proxy firms and other shareholder groups that are advising against that, in part because they blame Ernst and Young for failing to foresee some of the mess that was the Autonomy acquisition.

Other items of business is the say on pay proposal, a stock compensation plan and the formation of a human rights committee.

A shareholder is now speaking in favor of the human rights proposal. It deals with how HP does business in China and other countries with oppressive political regimes.

Schultz is speaking, and says that the creation of another committee to oversee human rights issues isn’t in the business of shareholders.

Another human rights proposal is up, submitted by a set of religious groups. A reverence whose name I didn’t quite catch is now speaking about it. “We have noted HP’s policies to human rights and related to supply chain and equal opportunity.”

2:20 pm: I’m paraphrasing what he says: He’s speaking on behalf of a proposal that would require HP to report in more detail on supply chain issues, making sure that workers employed by suppliers are protected. HP reports on a lot of this stuff already, but he’s pushing for a lot more detail.

Often, he says, confidentiality rules prevent HP from disclosing exactly how it evaluates its human rights policies with suppliers.

Schultz is speaking again and says the company opposes the proposal.

Now another shareholder proposal, this one about retirement plans.

Schultz is speaking again, opposing the latest proposal. And getting the voting under way.

2:32 pm: Okay, CEO Meg Whitman is speaking. Her remarks are starting with a video.

Meg again: “Most of you know that I’ve been CEO for 18 months. I’ve come to love this company.”

“I’ve now met with 300 or 400 customers around the globe, and they tell me they want HP to win.”

“Some of our customers have operations in 150 or 160 countries, and they want a partner that can match them every step of the way.”

Now on to innovation. “Did you know that HP was the top of the list for patents obtained in 2012 in Silicon Valley, and No. 50 worldwide.”

“But we have to do more, better, faster.”

“Third, I’ve found that HP has tremendous foundational assets, and talented and committed employees. And lastly despite what you may have read, we’re on a solid financial footing.”

“The biggest thing I’ve learned in the last year, is that together we truly make it matter.”

“There is still room for improvement. Fiscal 2012 results were not where they needed to be.”

Whitman: Partners are crucial to our future and we need to embrace them like never before.

Whitman is now revisiting the plan she laid out at the analysts meeting last year.

Whitman: The good news is, we said what we said we would do in 2012. We took action, and took our medicine, and met our guidance.

2:40 pm: Whitman: We expect 2014 will be characterized by recovery and expansion.

2:41 pm: In 2015 we expect you’ll see a rapid acceleration of growth and innovation.

Whitman is now reiterating the financial results.

Whitman: Net debt position has improved to $4.7 billion. But we’re not done. We have a long way to go.

First is creating solid product roadmaps that change how IT is designed and built.

We are reigniting the powerhouse of HP, which is the channel.

Whitman: Why I’m so confident about our strategy: We are living in a period of enormous change. Big shifts in how technology is consumed, used and paid for.

Whitman: It feels like a bigger change than what I saw at eBay.

Whitman: We will succeed because only HP can provide the solutions for the new style of IT. We are the only company that can bring our customers devices, services, software all at once.

2:48 pm: Whitman is closing her remarks.

It has essentially been a repeat of the same speech she’s been giving since HP reported its most recent quarter.

Whitman is closing with some nice praise of HP employees, who “continue to innovate through thick and thin.” She’s now wrapped up.

Time for a Q and A with the shareholders. I see about seven people queuing up to the mics from where I’m sitting.

A question about the data center business. Now about 15 people lining up for questions.

The questioner opines: Over the last two or three years I’ve lost lost half the value of my HP shares.

Whitman: One of the question you’re asking is if you’re better off with a vertical stack versus a commitment to open standards. One of the strengths of this company is the hardware business and the commitment to open standards and open architecture.

Whitman: Now she’s talking about Moonshot, the tiny servers using Atom or ARM chips and which use less power, and take up a lot less space. It’s disruptive innovation, she says.

Whitman is now talking about the 3Par storage business, which tends to simplify enterprise storage.

Whitman: We are actually sold out of our mid-tier storage product. We haven’t been sold out of a product in quite a long time.

Whitman: We are also the leader in software defined networking.

Question: What is the board’s thinking with regard to nominating an independent chairman?

Whitman: I came to HP at a difficult time. My view about the board is that they are helping to turn HP around.

Whitman: This group is helping me lead the transition. Once you decide how you’re going to run your company, you have to get everyone marching in the same direction.

Another question: Change to Win is up. Bill Patterson is speaking. “A strong opposition vote will be delivered to several directors who were involved in overseeing the Autonomy acquisition. In the event that some directors don’t receive a majority vote, the board should comment on that and what it intends to do going forward.”

3:02 pm: Patterson is still speaking. These shareholder rights are of limited value that the company can demonstrate that it has active independent directors. Will the board comment in the event of a strong opposition vote?

Meg just called on director Ralph Whitworth, the activist investor, who owns a lot of shares. He says that he bought the shares and approached the company. He offered himself as a director and Meg and Chairman Ray Lane were up for it. “You can expect some evolution of the board in the coming weeks or months.”

3:06 pm: Whitworth: I hope you will respect the results today and work with us to make this company stronger and more valuable.

More questions. SEIU union trust, a pension fund. Can you confirm that Whitworth has been appointed to a special committee to investigate the Autonomy acquisition. There’s a concern that directors who were involved with that deal not be on that committee.

John Schultz confirms a special committee has been formed. Whitworth, Gary Reiner and G. Kennedy Thompson are on it.

Schultz: The independence of this committee is passed on by a court of law. We believe the committee has the right scope of charter, and the members are the right ones in place consistent with the law.

The questioner is expressing “grave concern” that Thompson should not be on the committee.

A former HP employee, one who dates back to what he calls “the good old days,” would like HP to celebrate its 75 anniversary. Lots of applause.

Whitman: We have an employee committee on that.

Another question. Seven more people in the line. Latest questioner asking about human rights, surveillance in less developed countries. “Never ever admit that David Packard is most admired for cutting 10 percent off expenses, and cutting his own compensation.”

The questioner is suggesting the elimination of health insurance brokers somewhere in the employee benefit process.

Now 10 more people waiting in line to ask questions.

The “question” is more or less turning into a political diatribe about health care policy. Whitman is cutting her off and asking her to get to the point.

3:15 pm: She’s basically trying to get Whitman to support a single payer health insurance scheme.

Another question from a Presbyterian Minister. Something about never voting against the State of Israel. However, he says, HP is selling its products in a way that support the “occupation” of Palestine. He’s asking for transparency, which he says is lacking in the Proxy statement on how products are being used.

Whitman is pointing out an HP exec who is responsible for responses to questions like this, to address his concerns.

Another question from a shareholder and retiree. “My portfolio has taken a dramatic fall. Regardless of this, I marked a ballot to support everything the board recommends.” He’d now like to read something published in 1976.

He’s asking Whitman to stand up for the old HP Way. “It turns out its really hard to kill founder DNA. … We are at our core an engineering company.”

Question from a representative for the AFL-CIO fund. Can you address how the board expects the biggest vote against an S&P auditor in a long time? It’s a question about the proposal to dump Ernst and Young as an auditor.

Whitman: When we do an outside enterprise deal, we have to have someone certify the financials. To have someone other than our auditor do it, it’s not a good use of your money. It would be duplicative to have someone else do it.

Question: What other boards does Whitman serve on? How do you justify the time spent on other boards.

Whitman: After I lost the governor’s race [in California] I was asked to go on a lot of boards and I did. I have been reducing my committments to other boards. She used to be on the board of ZipCar and is now off that as the company has been sold. The remaining corporate board I sit on is Proctor and Gamble and that is good for HP. It’s good to see another big company struggling.

The same questioner is a fan of his HP 20S calculator. “It’s an example of the HP Way. I’d like to see that return.”

Whitman: I came to set this company up for the next 75 years. This company is an icon of American business. We are important around the globe.

One last question and then it’s time to announce the results of the vote.

Last question is from a guy who lived across the street from David Packard. Apparently,he’d like to sell a company to HP. Whitman is laughing.

Whitman is referring him to CFO Cathie Lesjak.

Proxy vote time.

This is the moment of truth. A few stragglers are still voting.

3:29 pm: Polls are closed.

Chairman Ray Lane is announcing the results based on the preliminary tally. Directors first. All have received at least 50 percent. All 11 directors have survived.

3:31 pm: And Ernst and Young has been renominated as HP’s auditor.

The directors and Ernst and Young were the two big items. We don’t yet know what the percentages were on the various directors who had been targeted by ISS, Glass Lewis, Calpers and others.

What’s left is the proposals on human rights committees. Less than 4 percent voted in favor.

It’s pretty much going as the company recommended. Patterson from Change to Win is asking for the percentages on the director votes.

Lane is declaring the business of the meeting concluded. That ends the meeting.

And we’re done!

The latest market data from research firm Gartner found worldwide server sales declined by 0.2 percent, even as revenue from sales of those servers increased by more than 5 percent. For the full year though, sales increased by 1.5 percent on a unit basis, while revenue declined slightly.

Budget worries caused many companies to hold back on replacing older x86 machines, Gartner said, especially in the enterprise and in some mid-tier data centers. That no doubt factored into some worries around Intel’s outlook when it reported Q4 earnings last month. The only ones really buying were big players like Google, Facebook and China’s Baidu. Sales of RISC-based machines running Unix, as well as specialized hardware like Hewlett-Packard’s Itanium servers, were also weak.

IBM made the most on a revenue basis, clocking in sales worth north of $5 billion, while HP sold the most on a unit basis, with a little less than 664,000 units.

On a regional basis, North America saw unit shipments grow 5.5 percent, followed by Asia/Pacific at 3.4 percent, and Latin America, which was essentially flat.

Europe, on the other hand, declined substantially, and that’s where a lot of the pain was. As sovereign debt and economic concerns continued to take much of the oxygen out of the room in those countries, server sales declined by more than 10 percent on a unit basis, Gartner said. Most companies there saw their unit sales decline except for Japan’s Fujitsu and Cisco Systems. In Cisco’s case, its unit sales grew by nearly 20 percent, but that was off a low base relative to the other vendors. By comparison, Cisco sold about 14,000 servers in the region, versus HP which sold nearly 248,000.

Looking ahead to the rest of 2013, Gartner said to expect modest growth, offset a little by a boost in the use of virtualization, which allows one physical machine to run as if it’s many virtual machines. Virtualization logically tends to eat into the overall volume of machines needed. Simply put, where you once needed two or four or eight servers, it’s pretty likely you can now, given the improvement in processing power plus virtualization, replace them with one or two or three.

Here’s the worldwide breakdown for the top five vendors in the quarter, revenue first.

That in turn triggered speculation that HP might be planning something special. Persistent rumors that HP is reconsidering the breakup option refuse to die, fanned in no small part by a sketchier-than-an-art-class report from Quartz. Word that Faber was on the scene as the earnings report crossed the wires led some traders to wonder if a breakup announcement was imminent.

Nothing could be further from the truth. The interview with Whitman happened early this morning, and she batted those rumors away once again: “I am convinced that we should not break up this company.” In the end, though, it’s going to come down to the turnaround strategy in place and the financial results that it yields. If it doesn’t work out, then naturally all options are on the table.

It’s also worth noting that HP shares are up by more than 15 percent today, and rose above the $19 mark for the first time since August. If nothing else, yesterday’s results have given shareholders hope that there is a light, however faint, far, far at the end of HP’s tunnel.

Anyway, it’s worth watching the interview, which lasts about 11 minutes:

Deutsche Bank analyst Chris Whitmore, in a note to clients this morning, gave credit where it was due, but maintained his “sell” rating on HP shares. For all the sunshine visible in HP’s results, the fundamentals remain weak. Better operating margins in printing, and a slower-than-expected bleed-off in services contracts helped. And the $2.6 billion in operating cash flow that was so helpful in paying down net debt? Half a billion of it came from a one-time tax benefit and lower bonus payments to employees in 2012, Whitmore writes. “Unfortunately, none of these items appear sustainable and underlying weakness persists across all HP’s major businesses,” he wrote.

While he raised his price target on HP shares to $12 from $10, Whitmore says there’s still no fundamental change in HP’s business to make him consider upgrading his rating: “We remain concerned about ongoing weak printer unit shipments and the structural decline of this market, ongoing deterioration across the PC industry on both a unit and pricing basis, poor bookings performance and future contract losses in Services, the ongoing rapid decline of high margin Enterprise products and the associated future high-margin Tech Services revenue run-off.”

HP shares are rising after hours on word that the company rather handily beat its own expectations and those of the Street. The consensus view called for it to report 71 cents a share in per-share earnings. HP came in at 82 cents. Sales were also ahead of the consensus, despite the fact that revenue fell in nearly every significant business segment.

Still, don’t harsh HP’s buzz with too many details. There’s more to crow about: Net debt of the operating company came down by $1 billion to $4.7 billion, and it’s looking like HP will be close to zero debt for the operating company this year.

The results if nothing else buy Meg Whitman and her team some time to quiet the critics who say HP should be split into two or more companies in order to unlock value. That buzz was prominent late in the trading session as rumors flew that a breakup announcement might accompany earnings. As careful AllThingsD readers might have already guessed, a breakup isn’t in the cards, at least not for the time being.

The conference call with analysts is about to get under way momentarily and I’m listening in. Expect lots of questions about the balance sheet, and probably more chatter about the breakup idea.

One bit of housekeeping: Since I’m in New York, the time stamps are set to Eastern Standard Time.

Earlier:
5:05 pm: Joining the call in progress. CEO Meg Whitman is speaking. She says the restructuring program put in place last year is having the desired effect.

Whitman: We improved operating company net debt position for the fourth consecutive quarter.

Whitman: Revenue from converged storage products was up 18 percent.

Whitman: In servers, business stabilized. We expect to grow market share by 1 percentage point this year.

Whitman: Networking showed continued growth, up 6 percent. I was also pleased with performance improvements in printing. New business models and new printers helped boost operating margins.

One thing that changed in developing markets is that the price of hardware has increased while the price of ink has dropped. That’s the Ink Advantage program she’s talking about.

Whitman: PCs gained 1.4 percentage points of share world wide, and 4 points in the U.S.

Whitman: Total enterprise services exceeded expectations. There is still a long way to go, but I believe that ES (the former EDS) will deliver on the recovery plan put in place last year.

Whitman: We are making significant investments to improve our channel partner programs.

Whitman: If we can mobilize HPs 300,000+ employees there is nothing we can’t do.

Whitman: Turnarounds happen when old and new customers believe. In HP’s case customers are really starting to believe. We saw a number of big wins including one with the U.S. Department of Veterans Affairs. Another is eyewear company Luxottica (sorry if I misspelled that), which hired HP to run its data centers.

Whitman: We clearly still face a long road ahead. I don’t like that we saw revenue declines in all our business lines. Restoring growth is a priority and we’re on it.

Whitman: It will be toward the end of the year before the recovery plan starts showing up on the top line.

5:14 pm: Whitman: There are a lot of reasons we are in the PC market. She’s addressing again why there won’t be a spinoff of the PC business.

Whitman: Pricing continues to be very competitive.

In Enterprise Group, we are seeing a tepid market in Europe for servers.

Whitman: We will now be breaking out converged storage from traditional storage to better show the growth there.

5:17 pm: Now Whitman is talking about the hiring of Larry Stack to reignite sales in the Enterprise Services group. (Wonder where you read about that first? You got it: AllThingsD.)

Whitman: Now talking about HP Labs under its new head Martin Fink.

Whitman: Talking about Project Moonshot. We expect this to truly revolutionize the economics of the data center.

Whitman: If just 10 large web services switched to Moonshot servers, they could save $120 million a year, and 100 million (?) metric tons of CO2 released into the atmosphere, because it consumes so much less power than prior models.

Whitman: I’m pleased about Q1 and feel good about the rest of the year.

Now CFO Cathie Lesjak is speaking.

Lesjak: At the highest level, I would characterize this quarter as one more data point in our consistent, but not linear, recovery plan.

Lesjak: Now she’s talking about some new reporting information disclosures.

Lesjak: (Going through the numbers again.) From a global economic perspective, we are still seeing headwinds, but some healthier pockets.

5:23 pm: R&D spending declined, though it was because of some tax credits and some contract accelerations in Q4.

Lesjak: Europe was a challenge, but we continue to see good signs in Asia-Pacific and Japan.

Lesjak: Decline in printer revenue is partially due to a shift toward higher-end printers and away from lower-priced ones.

Lesjak: Again, solid growth in server sales in Asia, especially in China.

Lesjak: Talking more about the storage business. Q1 was the fourth consecutive quarter where margins expanded. Now Business Critical Servers. Phase two of the trial with Oracle is expected in Q2, which will address Oracle’s breach of contract and damages.

(Though Oracle lost the first phase of the trial, it has promised to appeal the decision.)

Lesjak: In services, we have moved away from unprofitable contracts.

Lesjak: We saw strong growth in security and big data software offerings.

Now talking about cash and capital allocation. $253 million went back to shareholders through share repurchases, and $258 million via the dividend. Net debt is now $4.7 billion at the operating company level.

Lesjak: As we’ve said, 2013 is a fix-and-rebuild year. There are market and macro pressure and some of the ES changes are being delayed.

And now we’re heading into Q&A.

Question from Bill Shope of Goldman Sachs; he’s asking about the breakup idea.

Whitman: We have no plans to break up the company. (Heard that??) HP is better and stronger together.

Whitman: We have a terrific set of assets. When you think about our brand, our scale, our distribution, and importantly the customers want this company to be together. We feel strongly it’s better together.

Katy Huberty of Morgan Stanley: Earnings on the back half of the year look like they may come down. What else makes you cautious about the back half of the year?

Lesjak: It’s really about Enterprise Services not having the runoff in Q1 that we expected.

There’s also some challenges about the timing of signings.

Lesjak: There’s some cautious optimism there.

5:44 pm: Toni Sacconaghi of Bernstein: Where are you in your cost savings?

Lesjak: The non-labor savings are coming in later this year.

Question from Ben Reitzes of Barclays: I understand why you want to keep guidance in place, but why not raise the free cash flow target above $5 billion?

Lesjak: Glad you pointed out the operating cash flow. We’re happy with it, up 115 percent. We’ve really gotten a lot of discipline. We don’t typically update our cash flow mid year. Best way to think about it is that it was a very big deposit on the year.

Question from Shannon Cross: How will you judge the success of the OfficeJet ProX printer platform? How do you think about this versus your laser platform?

Whitman: This is an exciting opportunity because it prints at the speed and quality of a laster. We’re going to drive it as hard as we can. We’re going to measure the units installed. With regard to laser we have a great laser lineup, but if there is cannibalization; that’s the way business goes. If there’s going to be cannibalization, better we do it to ourselves than someone do it to us.

Missed a question there. Sorry about that.

5:53 pm: Question about Enterprise systems sales.

Whitman reminds us that BCS sales got whacked again. But there’s a good product lineup coming. Waiting for another mention of Moonshot.

Whitman: We have to make the right investments because it’s a big piece of HP’s profitability. (Lesjak just mentioned in the answer to the previous question that PSG accounts for only 10 percent of HP’s operating profitability.)

Another question, this one from Mark Moskowitz of J.P. Morgan. Clearly your net debt position is improving nicely. How are you thinking about investment internally from R&D and acquisitions?

Whitman: For 2013, we’re still focused on rebuilding the balance sheet and offsetting dilution. We’re going to stay focused on fixing what we have. You never say never, maybe there’s a tuck-in acquisition we have to have, but there’s nothing in the plan. Also, one thing we have to stop doing at HP is increase R&D and then pulling it back, and then repeating that. We’re going to stay on the plan that we have.

Question from Brian Marshall at ISI about the software business, where he’s seeing some deceleration of growth.

Whitman: The bright spots in software are Vertica and security. Apps and ops are not where we want them to be. We need to make some changes that will kick in by 2014. We have some basic blocking and tackling there.

Steve Milunovich asking about PC supplies and inventory.

Lesjak: Channel inventory on PCs, overall it’s good. On the consumer side, despite the fact we gained share in consumer we ended a bit higher than we would like. The real star is the channel inventory in printing. We have been dogged by ink supplies inventory being too high for several quarters. Now its down 27 percent since the peak. We’ve had dollar declines over the last six quarters.

Whitman: One of the things we’ve asked the business groups to do is limit discounting to get products out the door. It’s healthier for us and better for the channel. It also allows us to differentiate our ink and toner product and get away from the commoditization we were expecting about 18 months ago.

Final question from Credit Suisse: About free cash flow. Given the improvement, it looks like you will pay down most of your debt. If you are generating $6 billion to $7 billion in free cash flow each year, how dedicated are you to increasing dividends and buybacks?

Lesjak: At the end of the year we’ll be thinking about how we allocate capital around the time of the next analyst meeting. We are committed to returning cash to shareholders. Our view around dividends is that over the long term, our payout ratio should improve as well. We are aligned and working with the board to determine the mix.

6:05 pm: Closing remarks from Whitman: The turnaround is on track and we did better than we expected we would. We have to deliver and continue to execute as an organization.

And we’re done. See you next quarter!

Today’s earnings report, which is expected after the markets close for trading in New York, will be the first since the end of HP’s worst year ever. The list of its woes is well known. There was the Autonomy acquisition, which contributed more than $5 billion of an $8.8 billion write-down that shocked shareholders. That write-down came on top of another write-down, this one worth about $8 billion, on the 2008 acquisition of the IT services firm EDS. During 2012, HP’s shares traded at levels not seen since 2002, going back to the days immediately following its mammoth acquisition of Compaq Computer.

That acquisition made HP the world’s biggest vendor of personal computers, a market that is now in decline, but which affords HP a certain amount of scale that helps it in other businesses. Combined, PCs and printers, another declining market, amount to about half of HP’s revenue, and more often than not get most of the attention from shareholders. And for that reason it’s not exactly difficult to find Wall Street analysts who have rated HP shares with a “sell” or equivalent. Though likely untrue, persistent rumors that say a breakup or sale of a significant business unit is coming continue to goad HP shares higher. “Talking to investors, the biggest story on HP these days isn’t about its business fundamentals but whether the company will split itself in two or more pieces,” analyst Shaw Wu of Sterne-Agee wrote in a research note today.

The consensus of analysts polled by Thomson Reuters calls for HP to report a per-share profit of 71 cents on sales of $27.8 billion. The bar, however, is relatively low: A year ago, HP reported per-share earnings of 92 cents.

CEO Meg Whitman has made a persistent case that, despite all its recent troubles — and calling them “troubles” feels like describing World War I as a case of bad vibes — HP will not only be saved, but will remain whole. She has also characterized 2013 as the year during which the arduous work of repairing and rebuilding will begin in earnest.

Whitman has been hinting publicly that signs of the turnaround are coming, though they’re not yet visible. The narrative at HP lags reality, she said at The Wall Street Journal’s CIO Network conference last month.

For the moment, Whitman seems to have earned the trust of HP shareholders impatient for more positive results. She has been on the job 17 months, and on her watch, HP shares are down about 25 percent, while the S&P 500 has risen by 32 percent. By that benchmark, Whitman compares favorably with former CEO Carly Fiorina, who, at the 17-month mark, presided over a 46 percent drop in HP shares, while the S&P 500 was down only 6 percent. But at the same point in the Mark Hurd era, HP shares were up by 66 percent, well ahead of the S&P 500, which was up only 11 percent. (Whitman’s immediate predecessor, Léo Apotheker, never made it to 17 months.)

If that’s true, then there’s a good reason to expect that the turnaround she anticipates will be visible first in HP’s enterprise-facing businesses. In this, HP has a new weapon upon which rests a great deal of hope. It’s called Project Moonshot. Announced late in 2011, it is a fundamental rethinking of a server.

I saw an example of one during a meeting last month with Dave Donatelli, HP’s executive vice president and head of its enterprise business, during a recent visit to the company’s headquarters in Palo Alto, Calif.

It’s about the size of a trade-paperback book — and not a very thick one, either — yet it’s a full-blown server. It comes in flavors running Intel’s low-power Atom chip, but also ARM-based chips, and can be outfitted with many of them. For storage, it can be configured with a conventional spinning hard drive, or a flash-memory-based solid-state drive. It can also be tricked out with a lot of system memory, and with a graphical processor unit (GPU) like those from Nvidia, which are increasingly being used to give computers some extra oomph on certain kinds of computing jobs.

The case Donatelli makes is simple, and can’t help but resonate with customers, especially with those building large data centers: When compared to a mainstream HP server currently on the market, one built using the Moonshot approach consumes 89 percent less power, and requires 94 percent less physical space. “We imagine a world where you can fit thousands of these servers in a single rack,” he says. “It really is a fundamental revolution in how servers work.” And no one, Donatelli says — not Dell, not IBM, not Oracle — makes anything quite like it. And it will begin shipping soon.

Moonshot will be an important piece of HP’s strategy, especially as many big companies seek to build massive data centers running hundreds of thousands of servers at once. Large companies increasingly want to get the same economies of scale that smaller ones get by farming out their IT infrastructure to cloud companies like Amazon Web Services and Rackspace, but they don’t always want to let go of their IT infrastructure entirely. And then there are the cloud service providers themselves. “Many of the large cloud providers run 250,000 or maybe even a half a million servers. Within three to five years we’ll be talking many times that amount,” Donatelli says. “Those data centers will get very expensive, and they won’t be very environmentally friendly.”

And there are other important pieces on HP’s chessboard. HP’s cloud services business — which will presumably be a big consumer of Moonshot hardware, Donatelli says — is already a multibillion-dollar business. And its 3Par enterprise storage business — a company HP acquired in 2010 after a bitter bidding war with Dell — reported record sales in its most recent quarter. Then there’s enterprise networking, a business built primarily out of 3Com, a company HP acquired in 2009. Only Cisco Systems is bigger in that business, Donatelli says, and, yes, it’s a lot bigger, comprising about two-thirds of the addressable market, leaving HP and everyone else to fight over the remaining third. But that’s a fight that HP is winning, beating out, in the reckoning of research firm IDC, players like Alcatel-Lucent, Juniper and Huawei.

And what of Business Critical Servers, the unique HP business built on Intel’s exotic Itanium chip? Long a source of beefy profits derived from services supporting Itanium’s finicky customers, HP’s BCS business suffered from an injection of doubt about its future, whipped up in no small part by Oracle, which insisted that HP intended to kill the platform. Oracle said it would stop making software that supported it. That prompted a lawsuit from HP, which argued that Oracle had agreed to continue supporting Itanium, and was bound by that agreement. HP won, but it hasn’t helped HP sell more Itanium servers. That’s because, Donatelli says, Unix-based servers are fundamentally a business in decline. “That marketplace is in secular decline,” he says. “Although you and I will be here five years from now, and will still be talking about it, it is a shrinking market. We will drive as much revenue as we can from it and, over time, it will disappear.”

HP recently updated its line of Itanium servers with a machine that’s three times faster than its predecessor. But there’s also a solid business capturing recovering Unix customers and helping them move to more mainstream platforms running Linux and traditional Intel chips. HP does offer a “mission critical” server that contains a mainstream Intel Xeon processor. Expect more like that.

And what of those declining service revenues related to BCS? The good news is that they will decline slowly. Itanium customers aren’t exactly known for moving fast or swapping out their machines that often. The better news is that HP’s 3Par storage line carries with it an interesting service profile that’s kind of similar to what has been the norm with Itanium. “There is a backfill coming to replace what is being lost,” Donatelli says.

And while he couldn’t get specific — HP will be more specific when it reports its results later today — Donatelli said 2013 looks like it may be an important transitional year for HP customers, and thus for HP itself. “We see more and more customers starting to rethink how they run their operations, and how they can change them significantly,” he said. “We think that’s a big opportunity. The enterprise doesn’t move like a light switch. It moves gradually. But when it starts to move, it really moves.”

Basically it shows that every line of business at Dell continues to be in decline — except one, and that’s the combined server and networking businesses.

Here’s the slide, and it may constitute something of a last look at the state of Dell before it completes its leveraged buyout.

As you can see, servers and networking grew 18 percent, versus everything else, which declined year over year. Separate them out and server revenue grew 5 percent, while networking grew 42 percent. While the growth seems healthy, it’s not enough to offset everything else. Servers and networking combined amounted to less than 19 percent of sales. Dell’s business shrank in the remaining 81 percent.

It’s hard to make shareholders happy when the trend lines look like that. So now you see, in one place, why Dell is going private.

Dell reported earnings of 40 cents per share on sales of $14.3 billion, better than the consensus view of 39 cents a share on sales of $14.12 billion. Dell shares rose by 4 cents, or about 0.3 percent, to $13.85 after hours as the news crossed the wires.

Dell, you’ll remember, is still in the process of trying to transform itself from the PC-heavy company you remember from the funny TV ads into a more enterprise-focused company emphasizing servers, software and services. The main trouble Dell has had is that it hasn’t been able to make the enterprise-focused business grow fast enough — at least not yet — to offset the dwindling sales of the PC segment.

Since that hasn’t worked out so well yet, Dell has decided to pursue a leveraged buyout and go private. Expect a lot of questions from analysts about that, and precious few answers from Dell

I’ll have a little more in a few minutes after I’ve taken a closer look at the press release, but for now here it is:

ROUND ROCK, Texas–(BUSINESS WIRE)–
Dell announced fiscal 2013 fourth quarter and full-year results today, with revenue of $14.3 billion for the quarter and $56.9 billion for the year. Revenue from enterprise solutions and services grew 6 percent in the quarter to $5.2 billion and was $19.4 billion, or 34 percent of Dell revenue for the fiscal year, a 4 percent gain over fiscal year 2012.
“We continued to execute our long-term strategy in Q4, and realized a 6 percent increase in our enterprise solutions and services business,” said Brian Gladden, Dell CFO. “We also continued to generate strong cash flow from operations of $1.4 billion in the quarter. Our strong balance sheet and cash position enabled the company to invest almost $5 billion in new capabilities and intellectual property this fiscal year, including great assets like Quest, SonicWall, Wyse and AppAssure.”
Results
Revenue in the quarter was $14.3 billion, an 11 percent decrease from the previous year, and a 4 percent increase sequentially. Revenue for the 2013 fiscal year was $56.9 billion, an 8 percent decrease. Dell’s fiscal year 2012 had an extra week, which was incorporated into the company’s Q4 results.
GAAP operating income for the quarter was $698 million, or 4.9 percent of revenue. Non-GAAP operating income was $954 million, or 6.7 percent of revenue. Gross margins for the quarter benefitted by approximately $250 million, primarily resulting from vendor settlements. For the fiscal year, GAAP operating income was $3 billion and non-GAAP operating income was $4 billion.
GAAP earnings per share in the quarter was 30 cents, down 30 percent from the previous year; non-GAAP EPS was 40 cents, down 22 percent. For the fiscal year, GAAP EPS was $1.35, down 28 percent year over year and non-GAAP EPS was $1.72, down 19 percent.
Cash flow from operations in the quarter was $1.4 billion, and Dell ended Q4 with $15.3 billion in cash and investments. Full-year cash flow from operations was $3.3 billion.

Products and Solutions:
Dell server revenue increased 5 percent driven by strong growth in the company’s hyper-scale data center solutions business and migration to the company’s 12th-generation servers. The 12G-server line now represents almost 80 percent of Dell PowerEdge server revenue at average selling prices and margins that are a premium over previous-generation servers.
Dell networking continued to deliver strong growth, with a 42 percent revenue increase, including more than 100 percent growth in the company’s Force10 business.
Dell Quest software delivered revenue over the company’s stated target of $180-$200 million for the quarter. The company’s security software business also grew sequentially.
Dell desktop and mobility business revenue declined 20 percent and was up 3 percent sequentially.
Business Units and Regions:
Large Enterprise had revenue of $4.7 billion in the quarter, a 7 percent decrease. Operating income for the quarter was $393 million, a 16 percent decrease. Server and networking revenue increased 25 percent and ES&S business grew 10 percent. Revenue for the full year was $17.8 billion, down 5 percent from the previous year.
Public revenue was $3.5 billion, a 9 percent decrease. Operating income for the quarter was $236 million, a 25 percent decrease. Servers and networking revenue grew 11 percent. Revenue for the full year was $14.8 billion, down 8 percent from the previous year.
Small and Medium Business revenue was $3.4 billion, a 5 percent decrease. Operating income for the quarter was $385 million, a 4 percent decrease. SMB enterprise solutions and services sales increased 9 percent for the quarter, driven by servers and networking growth of 13 percent and services revenue growth of 17 percent. Revenue for the full year was $13.4 billion, down 1 percent from the previous year.
Consumer revenue was $2.8 billion, a 24 percent decline for the quarter. Operating income was $8 million, an 87 percent decrease. Revenue for the full year was $10.9 billion, down 20 percent from the previous year.
EMEA revenue decreased 14 percent in the quarter, Americas was down 10 percent, and Asia-Pacific and Japan declined 9 percent.
Company Outlook:
Given the company’s announcement Feb. 5 of a definitive merger agreement to take Dell private, the company is not providing an outlook for its fiscal 2014 or Q1.

For years, IBM’s Power line of servers has been aimed at higher-end businesses. The servers run IBM’s Power7 chips, and are priced to compete against servers running with chips from Intel. Starting prices on the entry level machines begin at $5,947.

On top of the price cuts, IBM said it will be working with technology distributors Ingram Micro and TechData, both of which will resell not only IBM’s PowerSystems, but also its PureSystems line, as well as some storage products. The agreement exposes IBM products to mid-size and smaller companies that IBM doesn’t usually sell to directly.

The move represents a bit of a competitive run against HP and Oracle and Dell, whose mainstream corporate computing gear is widely sold to companies of all sizes.

Using a combination of shares he already owns and personal cash, Dell will, according to most reports on the deal, nudge his ownership stake north of 50 percent. Silver Lake Management and Microsoft are also said to providing some of the financing, though the role of the software giant is, as The Wall Street Journal reported, still under discussion. Reuters reports that the deal could be announced as early as Monday.

Dell has been trying mightily to transform itself from the PC maker that no one could compete with in the 1990s to an IT hardware, software and services company. Shareholders have not been forgiving, and, in their defense, as analyst Shaw Wu recently observed in a research note to clients, Dell has spent about $13 billion on enterprise-related acquisitions since 2008, a recent highlight being the $2.4 billion deal for Quest Software; still, about 70 percent of its revenue remains tied to PCs sold both to consumers and to businesses plus ancillary products that are closely tied to PCs (printers, monitors and so on). That’s down from a much higher percentage early last decade, but turning the corner has been slow, and progress has come in fits and starts.

Meanwhile, the PC market has been in a state of decline, leaving Dell in a rush to replace slowing revenue growth in that space with other things. While the idea to transform Dell into an enterprise-focused company has merit, the PC business has been contracting so quickly that the changes aren’t having the desired effect on the shares.

Michael Dell talked about the strategy in an interview with AllThingsD in July. In that conversation, I asked him whether he thought shareholders tended not to give the company credit for the transformation strategy, and thus valued the company unfairly. His answer:

“Some shareholders get it and some of them don’t. That’s how markets work. Most who have looked at it carefully say this is the right thing to be doing. They quibble about some of the smaller points, but they see the larger logic of what we’re doing and our job is to keep doing it.”

Now it looks like he’s going to do it without the bother of having to report to shareholders.