On Monday, the company is officially taking the wraps off its plans. Nicira — which I’m told is pronounced like “nice era” — aims to be the vendor of a new networking technology that’s built specifically for the age of cloud computing.

One of the most important enabling technologies of the age of the cloud is something called “virtualization”: As computers have gotten more powerful, thanks mainly to the progress of Moore’s law and ever-better chips — a single computer can, with the aid of software like that created by VMware, act like it’s 10 or 20 or 40 different computers, all at once. Each “virtual machine” has, to its user, all the properties of a physical computer, and ensures that a single machine is used in the most efficient and cost-effective way possible. Customers who use cloud services can quickly “spin up” new virtual machines as needed to meet new demands, usually within minutes.

But generally speaking, networking hasn’t kept up. The pipes through which bits pour in and out of data centers have gotten faster, but they haven’t gotten much smarter. Where cloud servers are flexible, precise and easy to manage, networks are, by comparison, blunt instruments. Meeting new demand means adding new capacity, and that usually means adding new hardware to the mix, and that usually takes weeks, if not longer.

If you’ve ever wondered if it were possible to “spin up” a virtual network as readily as you do a virtual machine, wonder no more, for that is precisely what Nicira wants to offer you, without the addition of a single new piece of hardware, but rather only some software that runs on your existing server. You don’t even need to have especially advanced networking hardware.

Its the kind of thing that could give big enterprises some new flexibility in managing their network infrastructure, particularly as need and demand peaks and drops, whether by the day or because of a seasonal change that happens just once a year.

The company already has customers: AT&T, eBay, Fidelity Investments, Rackspace and the Japanese telecom giant NTT are all using Nicira, the company says.

Nicira calls its product an NVP, or network virtualization platform, and it is being described as the sort of advance that comes along perhaps once every quarter-century. That’s a bold claim, but the argument on which the company is making it holds water. On a day-to-day basis, where you deploy an application in a data center is as much a function of how much networking capacity you have available as it is one of computing capacity.

Virtualization on servers allows you to spread a single app over as many physical machines as needed, but the network connecting those machines is what it is, and if it isn’t up to snuff, you can either enhance it by adding new routers and switches, or live with it. The result is that you can’t be as flexible with deploying apps as you’d like, and that certain machines end up being underutilized by as much as one-third, which is costly over time. You end up having to buy more servers, then pay to run them and cool them.

The Nicira NVP, as CEO Stephen Mullaney told me, “decouples” a virtual network from the physical network hardware. “All of the intelligence, all of the control, all of the services now get done in the virtual space.” The result, what was once a dumb networking pipe carrying bits into two different virtual machines running on the same one, can now be programmed to act in vastly different manners, according to rules in the virtual realm. In much the same way a single computer gets turned into a dozen, a single network can be subdivided and act like a dozen individual networks. Or the reverse: Several networks can be cobbled together to act like one. And a virtual network can be created on the fly in minutes, just like a virtual machine.

A network you can deploy in minutes saves a lot of money, because it allows you to move quickly as your networking needs change. Most big companies who demand the heaviest network loads have agreements with their service providers — usually big telecom companies — that a request for new capacity requires a week or more, because it requires the physical presence of technicians who have to install and provision new gear. But what if you can reconfigure your network in 30 seconds to meet the needs of some new application? That’s exactly what eBay’s Cloud Architect JC Martin found he could do after installing Nicira’s software on the company’s servers. EBay is a Nicira reference customer.

Other reference customers had other interesting experiences and uses to report. Japan’s NTT uses cloud data centers to run some 10,000 virtual desktops — think PCs that are all virtual machines — and found that it was easier to quickly switch between data centers during the rolling blackouts that have become the norm since that country’s earthquake last year.

There is, of course, a great deal more technical detail, but the point you have to get is that this company is out to disrupt the networking industry in a way that it hasn’t been disrupted in a long time. The traditional solution to networking problems is more, better, faster hardware, and companies like Cisco, Juniper, and Hewlett-Packard, among others, are constantly on the lookout for opportunities to sell more of that hardware.

But what if you could look a sales rep from one of those companies in the eye, and tell them that their latest million-dollar router or switch isn’t needed? Once upon a time, before the days of virtualization, if you needed a new server, you had to buy one and have it installed somewhere. Now you can, in most cases, rent space on one within minutes, or literally provision another with a few clicks of a mouse. It changed the expectation and much of the calculus of the IT industry. Many companies never buy their own servers at all, and rent space from cloud providers like Amazon, Rackspace and Joyent.

Exactly what a similar disruption might mean for networking vendors is a little hard to imagine, but if the folks at Nicira are right about the potential this technology of theirs has, it looks like that disruption is coming, one way or another.

One thing Judge James Kleinberg did was dismiss a fraud claim by Oracle that said HP had been all sneaky when it concluded a settlement with Oracle that included an agreement to continue building software for systems using the Itanium chip. The settlement was struck only a few weeks before HP hired Léo Apotheker as its CEO and Ray Lane as its chairman.

But that’s not the important part of what Judge Kleinberg did. The most important aspect of yesterday’s action in Hewlett-Packard v. Oracle was the release of the unredacted version of Oracle’s cross-complaint. And it’s a juicy read.

I’ve posted the redacted version before. Now you can read all the bits that were blacked out.

What you’ll find is a lot of information that goes to the core of Oracle’s argument that HP has a lot to lose if the Itanium chip goes end of life, which is exactly what Oracle has said Intel plans to do. As the only major server vendor who sells boxes running Itanium chips, HP makes a lot of money — billions of dollars, according to a newly unredacted statement in the filing — on service-and-support contracts with its Itanium customers. As one HP executive is quoted on page four of the filing, without Itanium, HP would be “strategically screwed.”

Intel, on the other hand, was more or less ready to let the chip die. Having spent billions, dating back to 1989, to develop the Itanium chip, which outside of HP never saw any market success, Intel had to be convinced to keep building them. To do that, HP, the filing reads, paid Intel $440 million to keep Itanium chips in production for a few more generations, through 2014. The deal didn’t even cover the cost of the chips, as HP had to pay for them, as well, the filing reads. Oracle calls the arrangement a “pure pay-off to induce Intel to keep churning out processors that it really wanted to kill.”

And while there’s nothing specifically wrong with the arrangement by itself, Oracle’s point is that HP was misleading the marketplace about the true status of the keystone product in its Business Critical Service business. That unit, in no small part because of the uncertainty wrought by this lawsuit, saw its sales fall by 23 percent in HP’s most recent quarter.

Having won the release of the unredacted complaint, Oracle claimed something of a victory in a statement:

“Oracle is delighted that the Superior Court of the State of California, Santa Clara County, has rejected HP’s attempt to hide the truth about Itanium’s certain end of life from its customers, partners and own employees. We look forward to seeing all of the facts made public that demonstrate how HP has known for years that Itanium is end of life.”

It all sounds very reasonable, until you take into account the fact that Oracle acquired Sun Microsystems in 2010 and is now a big server vendor that competes with HP, and would by no real stretch of argument benefit from an exodus of HP’s Itanium customers toward other vendors. HP called the decision by Oracle to cease support for Itanium part of a “calculated business strategy” to mess up HP’s Itanium business and capture those customers. Yet the evidence so far suggests that the one benefiting from this fight is actually IBM.

HP claimed victory of its own, in a statement:

“HP is pleased that the Superior Court of the State of California, Santa Clara County, has rejected Oracle’s attempt to use a fraud claim to undo its contract with HP. We look forward to seeing the facts made public that demonstrate how Oracle’s March 2011 announcement to no longer develop software for Itanium servers was part of a calculated business strategy to drive hardware sales from Itanium to inferior Sun servers. This further demonstrates the fact that Oracle breached its contractual commitment to HP and ignored its repeated promises of support to our shared customers.”

HP has portrayed itself as the defender of the interests of Itanium customers, under attack by Oracle. As HP puts it in its statement, Oracle tried to induce customers running Oracle software on HP Itanium systems into replacing that hardware by limiting support and withholding software patches and bug fixes. “Customers were left without options to address bugs and other defects in their Oracle software,” HP says.

For HP, this is all a simple argument over whether or not Oracle can be held to the contract they agreed to in 2010.

The agreement stems from the circumstances of former HP CEO Mark Hurd’s resignation, and his subsequent hiring by Oracle as its president. HP sued Hurd and Oracle, and soon they settled. HP says that a clause in that settlement included a provision that Oracle would continue to port its database software to HP servers running the Itanium chip. Oracle has argued that this clause is not part of the final agreement. The settlement document itself remains confidential, but its details will likely emerge in the trial. Expect lots of arguing over different versions of the agreement.

I have embedded two documents below, for your reading pleasure. The first is Oracle’s unredacted cross-complaint, with all the blacked-out bits from the previous version now fully revealed for the world to see. Below that is a Case Management Conference Statement filed by HP lawyers, also unredacted, where it seeks to expose Oracle as making cold-blooded moves that would appear to be attempts to spur Oracle’s own software customers to abandon HP hardware. It’s not quite as juicy as Oracle’s document, but it has its moments, too. Enjoy them both:

HP v Oracle – Amended Cross Complaint

0077a 2011121 Hp Cmc Stmnt Unredacted

A start-up called Tilera today unveiled a chip it calls the TILE-Gx. Essentially, it’s a super-chip with 36 cores which — so the company claims — beats a traditional Intel server chip on the key metric of performance per watt.

For those who don’t keep score in the arcane world of semiconductors, I’ll revisit some of the basics of the above paragraph. We all know that Intel and its one main rival, Advanced Micro Devices, sell chips for servers. Those chips, and those that go into PCs, are generally known as x86 chips, a name derived from the instruction set they share.

On the other hand, there are ARM chips, which are a different breed, and exist in a very different ecosystem. Scores of companies make ARM-based chips for all kinds of different uses, and they license the basics of the designs from ARM, the company, which last year did $636 million in revenue.

ARM chips show up in phones and tablets from the likes of Broadcom, Qualcomm, Texas Instruments and Nvidia, but not so much in PCs and servers. ARM is even the basis for Apple’s A4 and A5 chips. At CES last year, Microsoft said it would create a version of Windows 8 that will support ARM chips. And a company called Calxeda (which I initially got mixed up with Tilera) is aiming to bring ARM cores to chips running in servers.

Tilera, based in San Jose, Calif., is backed by investments from Bessemer Venture Partners, Walden International, Columbia Capital and VentureTech Alliance; plus a trio of strategic investors, Quanta Computer, NTT Finance and Broadcom. Its new chip is based around an entirely new architecture developed by Tilera’s CTO Anant Agarwal, a professor at the Massachusetts Institute of Technology. It forgoes both the traditional x86 and ARM architectures. Aimed squarely at servers, its intention is to get the same work done that a traditional Intel server chip does, while using less power to do it.

That’s not a trivial benefit, especially in data center environments where servers are bunched together and pushed to the performance limit. The biggest operational expense in running them is going to be power. So it’s on this point that server vendors and chip vendors obsess over saving a watt here and there — over the machine’s useful lifetime, the costs will add up considerably.

How it does this is what makes it interesting. Essentially, the cores on the chip do something that an Intel chip can’t do: They communicate among themselves. The way I understand it — and I admit I’m simplifying it greatly — the cores on an x86 chip rely on a single communications channel, called the Bus, to communicate. The Tilera architecture allows each core to communicate directly with the other cores, thus eliminating the need for the Bus and cutting back on the need for power.

The top-end chip — there are two versions — has 36 cores. A core is essentially the main computing engine on a chip. If you’re reading this on a PC, chances are the chip inside it has two cores, maybe four. It used to be that chips had only one core, until it became logical to put two or more on a single chip. I’ve always compared multicore chips to roommates folding laundry together. When there’s a big pile of laundry to be folded, one person can certainly do it, but two or four get it done faster and with less effort. Multicore chips basically prove the old adage that many hands make for fast work.

There’s an obvious appeal to a chip like this, but there are a lot of strikes against it. First, much of the server ecosystem is pretty well entrenched. Companies run what applications they already have, and are usually loath to mess with their computing environments much. Changing the architecture of the CPU chip inside the servers is about as major a decision as a CIO may ever make, and one they don’t make lightly. First they’ll have to test it and run it for awhile, and then see how it interacts with other systems. It’s not the sort of decision that happens just overnight. Also, a new architecture brings with it a lot of software compatibility questions that will give many IT departments pause.

Meanwhile, Intel, which sells chips that go into most of the world’s mainstream servers, will continue to push its power consumption down. At the same time, it’s been trying like crazy to use its Atom line of chips to mount an attack on ARM’s territory and win business from phone and tablet vendors. That effort is just now seeing its first early successes. If there’s a great long-term story in chips that bears watching, the grappling between Intel and the ever-expanding universe of ARM vendors is certainly it.

Correction: I initially thought the Tilera chip was based on the ARM architecture. I’ve revised the story to correct that.

Shares are down more than $4, or about 13 percent. The freakout appears to be coming from gross margins that shrank to 51 percent from almost 59 percent in the prior quarter, and despite the fact that sales more than doubled sequentially to $84 million from $31 million before.

CEO David Flynn called me up a little while ago to talk about the results, and he reminded me that Fusion launched its new IO Drive 2. It’s a transition to a new product line that’s proving tricky. New products built on new technologies are always a little more costly to build up front, and that’s compounded by the fact that early adopters, when they buy the new stuff, take the lower-end version and not the more expensive and more profitable one.

Also, enterprise customers who buy the new stuff are always conservative and take longer to decide whether they want to buy it or not, he says. Even so, the company has sold 10,000 of the new drives.

But? There’s a new customer of record: Salesforce.com is now a Fusion-io customer, and has joined the likes of Apple and Facebook, which is using the flash-based chips in the servers running in its data centers around the world.

And Salesforce isn’t buying it directly from Fusion, but rather through one its OEM partners, which include Hewlett-Packard, IBM and Dell, though Flynn wouldn’t tell me which one it is.

Salesforce is one of six customers who bought more than a million dollars worth of Fusion’s stuff this quarter and of those, four were repeat customers, Flynn told me.

The Salesforce win is also important, Flynn says, because some have wondered whether Fusion’s technology, while popular with high-end enterprises like banks and Facebook, would make sense for applications that tend to be used in mid-tier businesses, which Salesforce’s mainline CRM application often is. The lower end of the enterprise software market is moving toward cloud-based software, which is often referred to as Software as a Service, or SAAS. “By helping those companies, we are indirectly driving business in the mid-range of the market. Apple and Facebook are in the SAAS business too, it’s just that their customers are consumers.”

One interesting fact that Flynn shared with me: His first job out of college was working for Oracle. His boss at the time? One-time Oracle exec and now Salesforce CEO Marc Benioff. A small world it is, indeed.

Veghte joined HP in 2010 after 20 years at Microsoft, where he managed the $15 billion Windows business and oversaw the launch of Windows 7. At HP, he has been credited with growing its software revenue by 18 percent last year.

Given Veghte’s history as a software guy, his appointment to this role can’t help but be seen as a key signal by CEO Meg Whitman of the role she sees software playing in HP’s strategy going forward. That was one of the things I asked Veghte about when we spoke by phone earlier this week.

AllThingsD: What, in your view, is the role of the chief strategy officer at HP, and what do you expect it to entail in the coming year?

Bill Veghte: As we’re out talking to customers, they’d like to buy more from HP; they’d like HP to be more successful. They look at the advances we’re making in networking or storage or printers, but they want to know why the whole is greater than the sum of is parts. What is HP’s strategy for continued leadership in the market transitions that are going on? And some customers would say that where HP is concerned, that’s not a fully realized opportunity.

And you’re coming at it from the software part of the business, and we’ve heard from Meg saying she’d like to grow opportunities in software. Your appointment, to me, sends a bit of a signal that software is going to be a big part of HP’s strategy to get things turned around. Is that accurate?

I think, certainly, as I talk to Meg and Ray [Lane, HP chairman], and with the members of the executive committee, I’ve found that this is a catalyzing role. If done right, there are different models of strategy in different Fortune 500 companies. And the one that makes sense here is catalyzing with other business units. Whether that’s Vijay Joshi in printing and imaging, or with Todd Bradley in PCs, or John Visentin in the enterprise group, there’s a strategy that each one of those is trying, and which is accretive to a whole that is greater than the sum of the parts. And so, to the extent that software is glue or networking is glue, I think it’s a statement that has more to do with a pan-HP strategy than something that’s specific to software.

What’s Job One, starting on your first day?

Job One is making sure that as we have those conversations with customers, they see an HP that is unified around a set of constructs and offerings that deliver what they need. It’s different from having offerings that are, by themselves, individually great. It’s about having unifying themes and constructs.

It seems that you’re talking about finding a way to routinely and thoughtfully combine different things that HP makes or does, in ways they aren’t being done now. Is that what you’re getting at?

I think that very accurately characterizes the opportunity. When we talk to the leadership team, we hear a lot of the same thing. There is a lot of great stuff within HP, whether you get that in terms of market position, or IP, or people. I like how you put that: How do you routinely and thoughtfully combine things, particularly in light of the market inflections that are happening. We are in a tectonic shift, and that can be an opportunity, if you clearly spell out the value proposition for customers. Not only in each one of the units, but where you’re thoughtfully combining them so that the whole is greater than the sum of its parts.

I thought of an example around meeting the needs of the market. There was an IHS iSuppli report out earlier this week about cloud servers, which are growing. But customers are going to Taiwanese ODM companies to get customized products, while at the same time cloud servers are growing generally. Is this the sort of thing that might affect HP?

I was talking to Dave Donatelli [general manager of Enterprise Servers] about this recently. It’s interesting, because it seems like in more recent months it has flipped back, because of the integration within that customization. A great example that Dave and I have been working on is the whole cloud system piece. You’ve got a lot of great stuff in automation and orchestration software that is inherently cross-platform, and which crosses virtualization engines and marrying that deeply with the converged infrastructure. We’re the only company that can give you a single stack, soup to nuts, from a single vendor. The core construct is that there’s a lot of private cloud build-out going on, and those customers who are doing it are saying they don’t want to be the systems integrator for six different vendors, and they also prefer not to be locked in to a single vertical stack. That’s a huge advantage for us. And to your point about routinely and thoughtfully combining, we should do exactly that. It’s been doing well for us in the marketplace, but how do you make that routine against the opportunities we see in the marketplace?

You spent about 20 years at Microsoft. How does that inform what you’re bringing to this job?

At the core, any of these jobs are about identifying and exploiting market shifts for customers. I had the privilege of having a front-row seat during some big marketplace disruptions, and helping catalyze businesses and delivering superior market positions and solutions. It’s all about handling change, and turning it into an opportunity.

In 2011, it crossed the threshold of $50 billion in annual sales for the first time, having hit the $40 billion mark only last year. This came after a tough year — 2009 — during which sales declined a bit to $35 billion, down from $37 billion in 2008. But the larger point is clear: Intel continues to be a significant growth machine in a tech ecosystem that is supposed to be on the decline.

Who says so? “The experts.” Earlier this month, Gartner and IDC both reported what they described as the second-worst year for PC sales growth in recorded history, second only to the doldrums of 2001, when the world was beset by the dotcom crash, the onset of the global war on terror and general recession, all in one. This came after the same two outfits made similarly depressing predictions for worldwide IT spending.

Intel’s results tell a different story. Consider its strengths: Sales in its data-center group — chips being sold to companies building servers that will be used to power data and applications running on the Internet — grew 17 percent year on year to north of $10 billion. And the lowly PC? The machine that is said to be on the decline by so many people who claim to know what’s going on? Sales in Intel’s PC client group grew by more than $5 billion year on year to north of $35 billion.

How can that be possible? It’s an argument that Intel has been making for some time now, and is now becoming familiar: Persistent strength in emerging markets. As Intel CEO Paul Otellini said on a conference call with analysts today, emerging markets, where household incomes are improving to the point that consumers are able to buy their first PCs, are accounting for two out of every three units of incremental microprocessor demand. Which means that for every three chips of new growth sold in a year, two are sold in an emerging market.

PC sales in China, by Intel’s reckoning, grew 15 percent, and as yet have only achieved a household penetration rate of 35 percent, which says there’s lots of room still to grow. By comparison, the U.S. market is 90 percent penetrated, meaning nearly everyone who wants a PC has one. India grew 22 percent; Indonesia, 37 percent.

Here’s another really interesting metric that should give you some food for thought: In 2012, Intel will spend $12.5 billion on capital expenditures. That’s more than twice what it spent last year. What is it spending so lavishly on? Four new chip factories — in Oregon, Arizona, China and Israel — which, when completed, will turn out chips built on the very latest, edge-of-reality technology, where chips have transistors and other elements on them that are at the 14-nanometer scale.

How small is 14 nanometers? About one-fifth the size of a typical virus cell, and only slightly bigger than the thickness of the cell wall of a typical germ. Next year, there will be four factories, employing thousands of people, turning out thousands — and later millions — of these miniscule fragments of silicon that arguably constitute some of the most complex implements mankind has ever built.

And Intel does this profitably, which is so difficult and requires such financial scale that most companies that make other kinds of chips long ago gave up running their own factories and farmed the work of actually building them to other companies. Intel is so good at it that its gross margins in 2011 were 62.5 percent. Its full profit for the year was nearly $13 billion on $54 billion in sales.

Yes, we beat on Intel for not having conquered the smartphone industry or the tablet industry as readily as it spent the 1990s bending the PC industry to its will. There is a school of thought that says Intel is less relevant today than it was, say, five years ago, and that its anemic presence in the future of personal computing — smartphones and tablets — is all the evidence one needs to render that judgement. In fairness, smartphones and tablets are still on the rise, and Intel is starting to show some promising progress, though its competition and an industry-wide preference for chips based on the ARM architecture will be difficult to dislodge.

Still, it’s a little hard to find much fault with Intel, when the numbers so clearly demonstrate that, despite the conventional wisdom, it is clearly at the height of its powers.

The company’s profit climbed by nearly 6 percent in the quarter, despite persistent worries that demand for personal computers is down generally in the face of worldwide economic uncertainty, the popularity of tablet devices like Apple’s iPad, and smartphones in which Intel’s chips are not a significant factor.

Yet, as has been the case for the last several quarters, Intel knows the demand for its global markets — specifically Brazil, Russia, India, and China — far better than any industry analyst, and its executives, especially CEO Paul Otellini, have seemed to enjoy bursting the bubbles of the IDCs and Gartners of the world, who continue to preach a catechism of PC doom.

It’s important for the wider tech industry, because if Intel is healthy, it says a lot about the health of the rest of tech. If PCs are selling well, that means consumers and companies are buying them, either to replace new machines or buying a PC for the first time. And if PCs are selling well, then servers are selling well. Behind all that talk about cloud computing and cloud services are physical servers sitting in a data center somewhere, usually containing Intel chips.

The earnings conference call is about to start, so we’ll get some better indications about how and why Intel managed to surprise the Street once again.

2:35 pm: Ah, joining the conference call in progress. CEO Paul Otellini is speaking and, naturally, he’s crowing about Intel landing a chip in a Lenovo smartphone announced at CES last week.

“In the first quarter, we completed the acquisitions of McAfee and Intel Mobile Communications, formerly of Infineon. They will allow us to extend our strategies across computing.”

He’s recounting highlights of the past fiscal year. During Q4, Intel acquired Telap, which specializes in location-based technologies.

Now he’s talking about a smartphone reference design, basically a board around which a phone maker can build and customize. In the reference design is an Intel Medfield chip. Also, a strategic relationship with Motorola Mobility. “While the Lenovo and Motorola designs are first steps, we’re not done making announcements in the space.”

Now he’s talking about more chips for 2012. For example, 70 Ultrabooks are coming to market this year.

2:39 pm: CFO Stacy Smith is speaking. Nice gross margins of 65.5 percent, which were in the high end of the range. That’s Intel’s speciality — efficiency.

Smith: We saw a reduction of orders for microprocessors as a result of the Thailand flooding. The flooding didn’t affect sales directly, he says.

Smith: Q1 revenue will be down a little more from the average seasonal decline, as the flooding will continue to affect sales.

Smith: 2012 growth of revenue in the high end of single digits. Capital spending of $12.5 billion, in order to build a fancy new fab.

Smith: We continue to see strong results in emerging markets, as increased incomes allow more people to afford PCs.

Time for Q&A with the analysts.

First question from Citi: He’s asking about gross-margin projections and revenues. What is the PC forecast assumption that underlies that?

Smith: It will play out similar to this year. There will be some unit growth, and we’ll benefit from a rich product mix. The high single-digit number in perspective. Strip out some things from 2011, we expect it to come down, in part because of lower GDP growth, but we see the same kind of trends in 2012 that we saw in 2011.

Citi analyst asks if the unit costs per chip are coming down.

Smith: That’s a normal phenomenon as we ramp factories to a new process, and then the cost comes down over the course of the year.

A question from Jefferies: As you get more success in the smartphone and tablet markets, I’m wondering if it’s your intention to get more chips up and down the stack, or is it different from PCs?

Otellini: Our intention is to participate broadly in all three of those markets. In tablets, we’ll be well-positioned for that. Who knows where the prices go over time, but we’d use the advanced silicon integration capabilities that we have to drive the costs down. We’re coming in at the top of the smartphone market; we’re aiming at best performance and very good battery life. And the Infineon acquisition has given us a very good position in basic phones. They shipped about 400 million modems.

Jefferies: Do they inherently carry more profitability than the PC processor business?

Otellini: The other guys have lower margins. But we’ll get paid twice. We’ll get paid as the foundry, but also for the architecture.

2:50 pm: Question from Bank of America: There were a lot of announcements on Ultrabooks from CES. Will they cannibalize notebook sales?

Otellini: I have not seen this level of excitement since before Centrino, which was in 2003. Initially, you will see this will be a replacement of existing notebook sales. People will trade up. As we move through 2012 and into 2013 as Windows 8 machines roll out, you have the possibility or even the probability of many of those machines incorporating touch. At that point, the machines incorporate the best of both the PC and the tablet. I don’t know how that plays out, but we’ll be well-positioned.

Question from JMP Securities: I know you don’t guide by segment, but what’s happening on the data center side of the business? And how does Romley change that? (Romley is a future server chip.)

Smith: Let me do a higher-level look. The data-center business can be pretty lumpy, but on a secular basis, we’re pretty confident in the growth trends.

Otellini: We’re seeing stronger growth for Romley than we saw for Nehalem at the same point in its lifespan, two years ago. Initially, it will not drive the same kind of replacement cycle that Nehalem did. It will drive replacement for high-capacity needs. I think this product is the most well-rounded in the genre so far.

Question from Deutsche Bank: Overall, as we look at flood impact, how should we see that snapping back, and against the backdrop of the seasonality?

Otellini: There are more moving pieces as I look out over the next 11 months. Our view is that the industry seems to be hitting the bottom of their output trough in Jan. and Feb. Everyone who seems to want to buy a PC has been able to. There are some stockouts in particular SKUs. You will see some compression of the supply chain. We think there is likely to be some refilling of the pipes in the second quarter, and into the third quarter. Or people will learn to live with leaner supply chains, which is always good for us.

3:00 pm: Question from Goldman Sachs: What’s the incremental growth in capacity? And what is the initial assumption on factory loadings?

Smith: Let’s talk about what’s driving the capital spending. $12.5 billion is a big number, but you have to take in the context of how our business has grown. Then it makes sense. I think my depreciation as a percent of revenue stays in a healthy range. In terms of the makeup of specific capital spending, it’s a two-year cycle as we’re building buildings. That part starts to come down in 2013. Buildings are depreciated over a longer period of time.

In terms of factory utilization, we’re running full-out today. We’re just in the beginning of the 22-nanometer cycle. We took advantage of the flooding by taking some older equipment offline sooner than we would have otherwise. We’re selling every 22-nanometer unit we can get out there.

3:06 pm: Totally missed the question from UBS. Sorry, UBS.

Question from Credit Suisse about Ultrabooks. Are there any sort of milestones you expect — perhaps, say, percentage of total notebooks?

Otellini: Starting with the mix. Core processors are about 70 percent of our mix, and that’s historically high for our premium brand. What we can’t yet predict is the mix between i3, i5 and i7. As we move toward the second half of the year, the mix comes down to i3. In terms of a target, our goal would be to exit the year with about 40 percent of consumer notebooks being Ultrabooks.

3:11 pm: J.P. Morgan asks if Intel is going to continue to spend like a drunken sailor on capital expenditures and R&D.

Smith says Intel is making some important investments this year, but they will come down from here.

A question from Nomura: Android tablet sales seemed like a disappointment in 2011. What was the issue, and is there a reason to be more optimistic this year?

Otellini: They were where I thought they would be, but I was below where others were. Until you get to Ice Cream Sandwich, you’re at a comparison with Apple’s iPad. The other part of that test is the Windows 8 tablets that are being queued up for production. I don’t think anything about the tablet market is settled yet. The jury is out on the long-term segmentation by form factor.

Ew. Questions from Barclays are being turned back. Smith just won’t go where he wants them to go. Too granular.

3:16 pm: Otellini: The data-center storage is not your grandmother’s data-center business of before. Back to lumpy data-center sales, when Facebook or Apple turns on a new data center. We’re seeing a change to the linearity to data-center sales. Expect more short-term lumpiness, but stick to the year-on-year growth.

One more question to go. And it’s from Caris & Co. He’s asking about capex again.

Smith: If you look at spending for capex in 2012, a historically large part of it is the four-factory model. From here, our capex will be a function of two things — the unit growth we see and the speed with which we bring our process technologies to the leading edge. We balance off those decisions as we go forward. With a big increase in units, we’ll spend the capex to support it.

Caris: You’ve taken on some debt in the quarter, as you look for flexibility to buy back more stock.

Smith: Our balance sheet supports taking on more debt, and we certainly have the capability of doing so. We’ve said in the past, our first priority is investing in the business. We bought McAfee and Infineon. We had a significant increase in dividends in 2011, and as a percent of free cash flow. We did take advantage of low interest rates and high-dividend yield to buy back a lot more stock.

And that is the end of the call. Good night!

While research houses like Gartner and IDC can’t seem to slash their 2012 spending forecasts fast enough to keep up with the ever-gloomier outlook, it’s a different scene in the area of servers used to build cloud services.

IHS iSuppli is out with some new research saying that the number of cloud servers sold this year will be 875,000 — or nearly double the 460,000 sold in 2010 — amounting to a surge of 35 percent over 2011, when 647,000 were sold.

And it gets better: The rate of growth is expected to continue over the next three years, in the 20 percent to 30 percent range. Cloud server sales will grow at a rate that’s five times faster than the rate of growth for general-purpose servers, iSuppli says.

And while cloud servers amount to only a 5 percent sliver of the overall server market now, by 2015, that will reach 15 percent. Apple, Google, Amazon and IBM will be pushing more cloud services to companies and to consumers; cloud-services companies like Salesforce.com, Workday and NetSuite, to name just a few, will be adding more services and more capacity as their businesses grow.

It’s good news for companies turning out servers, like Hewlett-Packard, Dell, IBM and even Cisco Systems, which is an increasingly important player in the server market, along with chipmaker Intel.

There is one wrinkle, iSuppli says. The market for server vendors is starting to widen away from the traditional vendors. When companies can’t get the customized products they want from traditional players like HP and Dell, they’re increasingly turning to Taiwanese ODM companies like Quanta and Wistron to build hardware just the way they want it.

This is, of course, bad news if you’re in the business of making the commodity Dynamic Random Access Memory chips that go into PCs, servers and smartphones. A state of oversupply coupled with weak demand means the chips command lower prices than they otherwise would. The situation can be good, however, if you’re buying computers, because memory upgrades get cheaper.

The problem, as related by the research firm IHS iSuppli, is a rise in inventories of chips that its analyst Mike Howard describes as “alarming.”

ISuppli measures how much unsold inventory the chipmakers themselves have in their warehouses — which include Micron Technology in the U.S., Elpida in Japan, and the South Korean pair of Samsung and Hynix. The higher the number is, the more intense the downward price pressure becomes.

The stockpile of DRAM chips as of the end of the third quarter of 2011 stood at 12.8 weeks, which is nearly a third higher than it had been three months earlier and double what it was in early 2010. It’s also a lot higher than the typical average of 9.2 weeks.

There are a lot of factors creating the glut. Tablets like the iPad and Kindle Fire are eating into notebook sales, and don’t require nearly as much DRAM as notebooks do. And new operating systems don’t require the incremental boost in onboard memory as had been typical.

Nor is the economic uncertainty caused by the sovereign debt crisis in Europe helping. Flooding in Thailand has also disrupted the supply of hard drives which has in turn affected the overall demand for PCs and servers. Computer makers who can’t get hard drives simply won’t build as many computers, and thus won’t be buying the DRAM they otherwise would be.

Something similar happened in 2008 when the global recession sapped computer demand and caused a pileup of DRAM chips that lasted nine quarters. This cycle could turn out to be worse, iSuppli says.

Overall, iSuppli reckons the market for DRAM chips was worth about $6 billion in the fourth quarter of 2011, down by 11 percent from the prior quarter, and it’s only heading further south. The worst, Howard says, is apparently yet to come.

If the economy turns upward, or even is perceived to be on the mend, the glut can work its way down pretty quickly. In 2009 the stockpile dropped by more than half over three quarters.

And if it seems obvious that these chip companies should just stop making DRAM and let demand catch up with supply, it’s actually not that easy. Chip factories, or fabs, contain billions of dollars worth of manufacturing equipment running processes that are difficult to stop and start. Also, it’s more expensive to have them sitting there doing nothing but depreciating than turning out a product that brings in revenue, even if it’s running at break-even or a slight loss.

So what happened? A few things, as Oracle execs tried to explain on a conference call.

• The currency effect: As President and CFO Safra Catz explained, what had been a 1 percent tailwind for currency effects turned into a 2 percent headwind. With all the violent swings in the value of currencies around the world as compared to the U.S. dollar, Oracle suffered a negative effect that pinched revenue.

• Deals didn’t close during the quarter: Catz said that in the final days and weeks of the quarter, some customers added an extra layer of executive approval to close deals to buy Oracle stuff. That meant that some deals Oracle had expected to close before the quarter’s end moved into the next quarter. Catz said that Oracle has taken steps to better manage deal flow to take this into account. It is consistent, however, with recent statements from other enterprise IT vendors, like IBM and NetApp.
• Transitions: Oracle’s SPARC server business just switched to a new chip called the T4, which was unveiled late in the quarter. The machines require a total upgrade, and that means a lot of testing with existing applications, which can slow down deals for the new machines, while at the same time sapping demand for the prior generation of products. That had a lot to do with hardware sales dropping by 14 percent year over year to $953 million. As Catz put it: “We saw good early demand for the new SPARC SuperCluster, but only released the product for general availability at the very end of the quarter, allowing us to ship only a couple.”

Catz also predicted that hardware sales will decline as much as 14 percent this quarter, although CEO Larry Ellison was bullish on its growth prospects later this year. New software license revenue, a key metric gauging software sales, is expected to grow in a range of 2 percent to 12 percent. Total sales are expected to grow in the range of 3 percent to 7 percent, and per-share earnings are expected to come in between 56 and 59 cents, which is in line with the consensus of analysts.

There were a few things that went right. Ellison did what he usually does on a conference call, and crowed about examples where Oracle is beating a competitor. This time, the targets were IBM, Cisco Systems and SAP, but not his usual punching bag, Hewlett-Packard. Oracle won several competitive deals from Big Blue and Cisco, as well, with customers as varied as Australia’s University of Melbourne, the U.S. Food and Drug Administration and the Hyundai Kia Motor Company.

Ellison also hinted that Apple is a big Oracle customer. He mentioned a “a very large American smartphone manufacturer” that had bought more than 30 Oracle Exadata systems as it built out its cloud. Unless I’m missing something, there’s really only one company that fits that description, and that’s Apple. Its use of Oracle gear within the mix at its North Carolina data centers has been speculated about before, but never confirmed by Apple directly. (Big surprise, that.)

The company reported a profit of 54 cents per share on $8.8 billion. The results fell short of the consensus view that Oracle would report sales of $9.23 billion and a per-share profit of 57 cents. Oracle shares, which had risen by 56 cents, or 2 percent, during the regular trading session, to close at $29.17, fell sharply in after-hours trading. As of 4:15 pm ET, Oracle shares were trading down $1.72, or 6 percent, on the news.

In the plus column, Oracle said its operating margin on a non-GAAP basis improved to 45 percent, and that it expects those margins to keep rising. Operating cash flow grew by 45 percent, as well, to $13.1 billion.

The company boosted its salesforce by 1,700 during the first half of the year, in an effort to boost sales of its Enterprise Resource Planning and Customer Relationship Management software products. Co-President Mark Hurd said the additional sales personnel should help sales improve in the second half of the fiscal year. (The quarter was Oracle’s fiscal second.)

The company said its board of directors approved a $5 billion share buyback and a 6-cent-per-share dividend.

CEO Larry Ellison said in a statement that sales of so-called engineered systems — essentially hardware that contains a lot of exclusive Oracle technology — surged versus the year ago period. Sales of Exadata database hardware and Exalogic servers both grew by 100 percent, he said. He also said that Oracle shipped its first SPARC SuperCluster during the quarter, and expects to commence deliveries of Exalytics Business Intelligence machines this quarter.

Oracle’s statement is below. I’ll be adding more to this post as I go through the press release, and will call out some highlights. The company is hosting a conference call shortly.

(The pitch-perfect image of the Team Oracle plane doing a dive during San Francisco’s Fleet Week was taken by Ingrid Taylar for About.com.)

Oracle Reports Q2 GAAP EPS Up 17% to 43 Cents; Q2 Non-GAAP EPS Up 6% to 54 Cents

Trailing Twelve Month Operating Cash Flow Up 45% to $13.1 Billion

REDWOOD SHORES, CA–(Marketwire -12/20/11)- Oracle Corporation (NASDAQ: ORCL – News) today announced fiscal 2012 Q2 GAAP and non-GAAP total revenues were up 2% to $8.8 billion. Both GAAP and non-GAAP new software license revenues were up 2% to $2.0 billion. Both GAAP and non-GAAP software license updates and product support revenues were up 9% to $4.0 billion. Both GAAP and non-GAAP hardware systems products revenues were down 14% to $953 million. GAAP operating income was up 12% to $3.1 billion, and GAAP operating margin was 35%. Non-GAAP operating income was up 3% to $3.9 billion, and non-GAAP operating margin was 45%. GAAP net income was up 17% to $2.2 billion, while non-GAAP net income was up 6% to $2.8 billion. GAAP earnings per share were $0.43, up 17% compared to last year while non-GAAP earnings per share were up 6% to $0.54. GAAP operating cash flow on a trailing twelve-month basis was $13.1 billion.

“Non-GAAP operating margins increased to 45% in Q2,” said Oracle President and CFO, Safra Catz, “and we expect those margins to keep growing. Operating cash flow over the last twelve months grew to $13.1 billion; that’s up a remarkable 45% compared to the preceding twelve month period.”

“We have expanded our worldwide sales capacity by adding over 1,700 sales professionals in the first half of this fiscal year,” said Oracle President, Mark Hurd. “We believe that this increase in our field organization combined with innovative new products like Fusion Cloud ERP and Cloud CRM will enable solid organic growth in the second half of this year.”

“Sales of our engineered systems accelerated in Q2,” said Oracle CEO, Larry Ellison. “Exadata growth was well over 100% compared to last year, and Exalogic grew more than 100% on a sequential basis. We shipped our first SPARC SuperCluster in Q2 and expect to begin deliveries of our Exalytics system and the Oracle Big Data Appliance in Q3.”

Oracle announced that its Board of Directors authorized the repurchase of up to an additional $5.0 billion of common stock under its existing share repurchase program in future quarters.

The Board of Directors also declared a quarterly cash dividend of $0.06 per share of outstanding common stock. This dividend will be paid to stockholders of record as of the close of business on January 11, 2012, with a payment date of February 1, 2012.

Oracle paints a picture of HP desperate to preserve the profits it makes on support and service contracts generated from customers using Integrity servers, cutting arrangements with Intel to keep pumping out Itanium chips that no one but HP buys, and which Intel would secretly like to forget in order to focus on its highly profitable line of mainstream Xeon server chips. Oracle describes an agreement between HP and Intel called the “Itanium Collaboration Agreement” and calls it a “a pure pay-off to induce Intel to keep churning out processors that it really wanted to kill.”

Here are some other interesting highlights. Remember yesterday how I said that the main issue, at least from HP’s perspective in this suit, is whether or not Oracle agreed to continue to port its software to HP-UX so that it could run on HP’s Integrity servers that use Intel’s Itanium chip.

HP has argued that when the two companies settled a lawsuit concerning Oracle’s hiring of former HP CEO Mark Hurd, that Oracle agreed to do just that. Oracle has argued that it agreed to no such thing and so is perfectly within its rights to walk way from the Itanium platform.

Pick up the action on page 27. You read how, as Oracle tells it, HP sought to insert language into that settlement that included an Oracle pledge to stick with Itanium, which Oracle rejected twice.

It quotes an email from Oracle General Counsel Dorian Daley to HP lawyers proposing the following langauge in a draft agreement:

Reaffirmation of the Oracle-HP Partnership. Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership.

HP, Oracle says, then responded with the following proposed language:

Reaffirmation of the Oracle-HP Partnership. Oracle and HP reaffirm their commitment to their longstanding strategic relationship and their mutual desire to continue to support their mutual customers. Oracle will continue to offer its product suite on HP platforms and HP will continue to support Oracle products (including Oracle Enterprise Linux and Oracle VM) on its hardware in a manner consistent with that partnership. Oracle will continue to support all ongoing versions of HP-UX with Oracle’s relevant database, middleware and application products with the availability, marketing and pricing in competitive terms that Oracle has provided HP for the past five years. Oracle will continue to provide access to the Java technology and tools such that HP can continue to support its operating systems (e.g., HP-UX, OpenVMS, Nonstop) in a manner similar to the way it does today. Oracle agrees to continue to provide Solaris for HP’s x86 platforms in a manner similar to what it provides HP today. Oracle agrees to continue to purchase HP server hardware for internal use at a rate similar to what Oracle purchases today.

Oracle rejected it, and by its account, no mention of Itanium or HP-UX was in the final version of the settlement that both signed. The final version was nearly identical to the draft that Daley proposed above. This sequence of events and what the final version of the agreement actually says will be a key issue in the trial. A lot of the rest of the stuff is a bit of Oracle bluster, though it’s interesting bluster.

For instance, Oracle accuses HP of having “fraudulently induced Oracle to enter into the very contract” at the heart of the lawsuit, by negotiating at a time when people on the HP side would have known that the company was about to hire Léo Apotheker and Ray Lane as CEO and chairman. As Oracle puts it:

“Given the well-documented animosity between Oracle and Messrs. Apotheker and Lane, HP knew that had Oracle known of HP’s imminent plans to hire these individuals, Oracle would not have signed the Hurd Agreement, especially any ‘partnership’ commitments or other business restrictions … unrelated to Mr. Hurd’s move to Oracle. … HP had a duty to disclose this exclusively-held material information. Instead, HP knowingly and actively withheld this information.”

HP naturally isn’t taking the latest round of accusations from Oracle silently. The company just issued a statement basically accusing Oracle of trying to distract us all from the fact that it’s in breach of a contract. And the key phrase in the contract — all that back and forth between the Oracle and HP lawyers above — is this one: “An agreement to continue to work together as the companies have,” meaning work together as they did when Oracle still supported Itanium.

This all started back in March when Oracle said it would stop software development for Itanium. It prompted a lot of shocked and angry pronouncements from HP and Intel and counter-claims from Oracle. Itanium customers then rallied to its defense and sought to change Oracle’s mind. It didn’t work. Months passed, and HP resorted to a lawsuit in June that has seen many colorful arguments, and even the odd pop-culture reference.

HP’s press-release rebuttal is below and the full PDF of Oracle’s filing — complete with all the redactions is below that.

PALO ALTO, Calif., Dec. 2, 2011 – HP today issued the following statement in response to Oracle’s amended cross-complaint in the Intel Itanium litigation:

Today’s filing is another example of Oracle attempting to distract from the undeniable fact that it has breached its contractual commitment to HP and ignored its repeated promises of support to our shared customers.

Here are the facts:

— On Sept. 20, 2010, Mark Hurd, Oracle and HP entered into a written settlement agreement. Pursuant to that agreement, HP dismissed its lawsuit against Hurd, and did not further challenge Hurd’s employment at Oracle. In exchange, Oracle contractually committed that it would “continue to offer its product suite on HP platforms … in a manner consistent with [the Oracle-HP] partnership as it existed prior to Oracle’s hiring of Hurd.”

— Oracle confirmed that it was agreeing to continue to port its software products to HP’s platforms in the same manner as it had done prior to its hiring of Hurd. In an email sent to HP on Sept. 12, 2010, Oracle’s general counsel wrote that this provision was “an agreement to continue to work together as the companies have – with Oracle porting products to HP’s platform and HP supporting the ported products and the parties engaging in joint marketing opportunities – for the mutual benefit of customers.”

— Oracle now claims that this provision does not require Oracle to continue to port its database and other software to HP’s platforms. Yet that is exactly what the contract says, and that is exactly what Oracle committed to do in order to convince HP that Oracle’s hiring of Hurd would not alter the relationship between the companies or be used unfairly to undermine HP’s business.

— Oracle initially tried to justify its Itanium decision by falsely ascribing to Intel the position that Itanium is at end of life. Due to Intel’s unequivocal and repeated statements to the marketplace that Itanium is not at an end of life, Oracle has been forced to revise its rationale.

— In its cross-complaint, Oracle tries to rationalize its Itanium decision by arguing that, despite the undisputed existence of committed support for Itanium that stretches to the end of this decade and beyond, Intel would not have made this commitment to Itanium if it were not for a contractual agreement with HP.

— The existence of such a contract completely undermines Oracle’s stated rationale for discontinuing Itanium support by taking the future of Itanium out of the realm of speculation and firmly establishing as a matter of undeniable fact that there is a committed Itanium roadmap that extends out toward the end of this decade. Oracle has the relevant Itanium roadmaps in its possession, yet it continues to refuse to discuss those roadmaps.

— What has become very clear in the course of the litigation is that Oracle’s claim in March 2011 that it was ending support for Itanium because Itanium was at or near an “end of life” was false and a pure pretext to hide Oracle’s real purpose: to take away the choice of Itanium from customers and restrict the competition faced by its Sun servers.

— Indeed, Oracle’s internal documents make clear that its announcement in March 2011 that it would no longer develop or support software for Itanium servers was implemented as part of a business strategy to leverage Oracle’s dominance in database software to try to force Itanium customers to purchase Sun servers. The tactics employed by Oracle in support of this purpose included pricing misconduct, withholding of benchmarking scores for HP servers run on Oracle software, and abusing customers on support issues.

— Oracle is in breach of its contractual commitments to HP, and it has failed to honor its promises to customers. Oracle should be addressing and rectifying this conduct rather than making up claims against HP.

70777_xREDACTEDxxAmendedxCrossxComplaint

The expected filing is Oracle’s amended cross-complaint, wherein the company will lay out the basis of its legal argument explaining why its March 23 decision to stop building software that runs on servers using Intel’s Itanium chip was not only justified but doesn’t violate an agreement struck last year between Oracle and HP.

Oracle has made several colorful claims in court. Last month, for example, it compared an arrangement between HP and Intel to continue to produce and evolve the Itanium chip to a remake of the film “Weekend at Bernie’s.” And in August it argued that HP engaged in fraud by not telling Oracle that it was about to hire Léo Apotheker as its CEO and Ray Lane as its chairman when it was negotiating a settlement to a 2010 lawsuit over Oracle’s hiring of former HP CEO Mark Hurd.

But the real issue is a simple one, say people familiar with HP’s thinking in the case. Did Oracle agree to a contract with HP to continue to support Itanium — as it has been doing for years — or not?

The year 2010 was a weird one for executive moves among tech companies. Hurd resigned as CEO of HP, and took a job as president of Oracle just as Oracle was in the process of acquiring Sun Microsystems. HP sued Hurd and Oracle, and soon they settled. HP says that a clause in that settlement included a provision that Oracle would continue to port its database software to HP servers running the Itanium chip. Oracle has argued that this clause is not part of the final agreement. The settlement document itself remains confidential, but its details will likely emerge in the trial. Expect lots of arguing over different versions of the agreement.

One key part of Oracle’s argument has been that HP has been paying Intel to keep the Itanium chip alive in the face of its failure to gain traction in the mainstream server market over the last decade. This is something that HP readily concedes, since it and Intel developed the chip together in the early 1990s, and regularly renew their agreements — in 2004, 2007 and again in 2010 — to commit resources to build it and to design new generations of the chip every few years. The latest agreement calls for Intel to build two new generations of the chip.

Another argument Oracle has made concerns HP’s management during the last year. When the 2010 agreement ending the Hurd lawsuit was struck, HP was nearing the end of its search to replace Hurd. CFO Cathie Lesjak was interim CEO at the time. Ten days later, HP announced that Apotheker would become CEO. In a filing in August, Oracle argued that it never would have agreed to the Itanium partnership had it known that Apotheker, a onetime co-CEO of SAP and a figure in a contentious Oracle-SAP lawsuit, was about to become HP’s CEO. Ditto Ray Lane, a former Oracle president who was named HP’s chairman earlier this year.

People familiar with the case say that Oracle seemed unconcerned about HP’s ongoing search for a CEO, and didn’t raise any questions about it during settlement negotiations for the Hurd case. These people say that HP wasn’t deceptive, but that even if it had been it will be difficult for Oracle to argue that it’s not bound by the terms of the settlement. The language is clear and unambiguous enough that Oracle would have to argue that the Itanium clause in the agreement means nothing, these people say.

One thing is certain: The damage that HP is suffering from the ongoing uncertainty in the marketplace over its Itanium-based servers is starting to sting. HP calls these machines its “business critical” servers, and they are industrial-strength computers that aren’t sold in large numbers. Indeed, HP is the only vendor of note that even buys the Itanium chip.

But it’s a historically profitable business — HP won’t say exactly how profitable — on which HP charges its customers large service and support fees. In 2010, HP reported revenue of $2.3 billion from its business-critical operation, amounting to less than 2 percent of its $126 billion in sales that year. In 2011, HP reported that sales in its business-critical unit dropped 23 percent in the fourth quarter over the same period a year ago; sales for the year fell to just above $2 billion.

HP has argued that Oracle’s motivation is to steer HP customers toward its Sun hardware. If that was the strategy, sources briefed on the case say, it isn’t quite working out that way. One lucky party benefiting from the fight, they say, is IBM, who is winning business from some former HP customers. It’s one reason that HP is arguing for a speedy trial.

That, said Intel CEO Paul Otellini, is one of three myths he aimed to bust today in a speech at a Credit Suisse technology conference in Phoenix.

First off, he pointed to the emerging markets. Intel is seeing significant growth in countries like Argentina, where the market for PCs grew 38 percent in 2011; Venezuela, where it grew 34 percent; and Russia, which grew 26 percent. “This emerging market trend is real,” Otellini said. And it’s not likely to end anytime soon: In 2010, the top five PC markets by country were the U.S., China, Germany, Japan and Brazil. In 2015, Intel forecasts suggest, the top five will be China, the U.S., Brazil, Russia and Germany.

With all the attention on phones and tablets, especially Apple’s iPad and various Android devices, the PC has gotten a little stale, Otellini conceded, so it’s time to make it exciting again. Intel’s answer is the Ultrabook. Thinner, sleeker notebooks that boot up fast and have touch-enabled screens and long battery lives will get consumers excited again, he said.

And don’t forget the part that Intel plays in the cloud: Most of the servers running cloud services have Intel chips inside them. And Intel’s data center business has doubled over five years and will double again in the next five. “This is where we see more and more of our customers buying from us direct. They’re building custom boards to run the data centers at Facebook, at Amazon, at Google, at Baidu and Alibaba,” he said.

Myth No. 2: Intel chips are too power-hungry for mobile devices.

Moore’s Law is still alive and well, Otellini said. In 1997, Intel built a supercomputer called ASCI Red that could compute one teraflop. It required 2,500 square feet of space and 9,298 chips to get the number crunching done. Earlier this month, Intel announced a chip codenamed Knight’s Corner that can do a teraflop by itself. In the mainstream marketplace, today’s notebooks are 300 times more powerful than notebooks built in 1995.

Intel, Otellini says, has built its own demonstration Android smartphone to show off the upcoming Medfield generation of its Atom processor, due in 2012. When its power consumption during basic phone functions like things like standby, audio and HD video playback is measured, Intel isn’t the best, but it’s not the worst, either. It usually comes in second or third place when compared against smartphones already in the market, but ahead of others, though Otellini didn’t say which phones it beat and which ones it didn’t.

And on three computing performance benchmarks it beats the others hands down: When using a browser on a phone, the Intel chip smokes the others. It also wins on GLBench, a graphics metric, and SunSpider, a Java test.

Myth No. 3: Intel can’t compete with ARM.

Yes, it’s true that ARM-based chips are everywhere that Intel would like its Atom chips to be and are showing no signs of giving ground.

But, noted Otellini, despite the growth of newer platforms, Intel and its x86 instruction set still command the largest army of software developers — north of 14 million — and the largest body of software created so far — more than 6 million applications. “As we come into these markets we’re bringing an incredible legacy of people that know Intel and know the Intel architecture.”

Then there’s Windows 8. Otellini called it “one of the best things that has ever happened to our company.” It will allow tablets to gain mainstream acceptance, especially in the enterprise that they don’t have today. “A lot of IT managers are worried about security and about porting their legacy applications to an Android tablet or an iPad. What Microsoft is doing is making that seamless for them.”

Finally, he said, Intel has a history of entering markets dominated by someone else and dominating them over time. In the early 1980s as the first Intel chips went into PCs, the dominant machines on the market were the VIC-20 and the Apple II. In the early 1990s, when Intel first went after servers, the dominant chips came from Sun Microsystems and IBM. Now Intel rules both markets. And the same thing has happened in supercomputing. (See the slide from Otellini’s presentation below, though someone needs to check the first field at left because the VIC-20 appears twice.)

Did his mythbusting work? Intel shares rose a bit today, closing up 12 cents to $23.58, and the shares are up 12 percent so far this year. We’ll see how right he was in 2012.

Update: Intel has corrected Otellini’s slide. No longer does it show the VIC-20 occupying two market segments. Well, it was kinda popular.

In a market that grew overall by more than 5 percent to $12.3 billion in revenues and 2.2 million servers sold, HP and IBM were neck and neck on a revenue basis, each accounting for about $3.8 billion, or about 29 percent of the market, followed by Dell, Oracle and Fujitsu.

On a unit basis, HP was the undisputed king, selling 693,000 servers, which works out to an average price of about $5,500 each. IBM sold 288,000 at an average price north of $13,000. Dell sold 518,000 servers.

For HP, both figures represented year-on-year declines of about 3 percent, and are roughly in line with the results HP reported last week. HP said that sales of industry standard servers, meaning those that run regular Intel chips, were down 4 percent, and business critical servers — the ones that run the exotic Intel Itanium chip — were down 23 percent, thanks in no small part to the ongoing scrap with Oracle.

Generally, the server market was healthy worldwide, except in Western Europe, where sales declined by about 5 percent. Asia, on the other had, made up for that by growing nearly 24 percent. Eastern Europe did even better, growing more than 27 percent.

Demand was strongest for basic x86 servers, running chips from either Intel or Advanced Micro Devices, where growth was north of 9 percent on a revenue basis. Servers running Itanium and RISC chips, which include things like IBM’s Power architecture and Oracle’s SPARC, declined on a per-unit basis, but oddly saw revenue increase a little, meaning that those machines sold are for one reason or another commanding a higher price.

(Image from Treehugger.com)

The country is now beginning the arduous job of cleaning up from the floods that killed upwards of 600 people and dealt a body blow to its industrial and manufacturing base.

One industry hit especially hard is the computer business. The world relies on factories in Thailand to turn out critical components used to build hard drives, and factories there are out of commission for now. This is not a trivial problem — the factories in question are not easy to replace, retool and restart once they dry out. Nor is the answer simply for the hard drive manufacturers to build new factories somewhere outside the flood zone.

This is the kind of supply chain disruption that the computer industry hasn’t seen in many years. I had a chance to talk with Steve Luczo, the CEO of Seagate Technology, for his view of the situation. Seagate has been relatively lucky in that its factories haven’t been directly impacted like those of Western Digital and Toshiba. But many companies that supply Seagate with necessary components have been hit, and it will be some time before they’re back on their feet.

Luczo told me that the computer industry as a whole — including companies who make PCs, servers, workstations and any other device that contains a hard drive, whether a set-top box or an enterprise storage device — can expect acute supply-chain disruptions to last well into 2012, and that it will take until the end of 2013 for the industry to return to its pre-flood operating posture. You read that right: It will be two years before the supply of hard drives is anywhere near “back to normal,” and there are simply no easy solutions for getting it fixed.

An estimate by the market research firm IHS iSuppli pegs the available supply at 125 million units, which is about 29 percent short of demand of 175 million units. By its reckoning, more than one-quarter of the world’s hard drive manufacturing capacity has been disrupted in one way or another, including 45 percent of the capacity devoted to making hard drives for personal computers. I spoke with Luczo by phone yesterday, and tossed in an extra eighth question because of the importance of the subject.

AllThingsD: Steve, at a high level, I think everyone understands the problem. There’s been a terrible flood in Thailand, and a lot of factories that make crucial parts for hard drives are out of commission. To that end, I think people expect this to be a temporary problem that works itself out in a couple of months. But you say it’s a much more complex problem than most people realize. You’re tracking this situation day to day, and probably hour by hour. So, how bad is it, really? And what’s likely to happen?

Luczo: What’s surprising to us is that even with all the data out there — we’re six weeks into it — there are a lot of fairly sophisticated companies that haven’t fully come to grips with the depth of the problem and the duration that is likely to occur. What is going to happen in the next couple of weeks is that the real shortage begins to show up right about now. There was already a lot of built inventory and a lot of finished goods moving through the system. And now all that is gone, and I think customers are starting to see shelves of parts go empty, and realizing that they’re not going to be filled for anywhere from one to two months. So the concern is heightened.

We heard Meg Whitman talk about this on HP’s earnings call Monday. She said HP stepped in and started doing some strategic buying. She says HP is going to see effects at least through the first half of next year. Apple talked about it on its earnings conference call, too. Are you hearing from them?

Tim Cook at Apple was way in front of this. I saw Tim the first week it happened, and took him through the situation, and in 15 minutes he understood the magnitude of it. Meg was on the second week of her job as CEO when I went to see her, and she got it right away. HP’s procurement VP, Tony Prophet, was also early to understand this. Companies like that reached out to us early on, because they understood that this is going to be an extended problem. They started asking for longer supply agreements. Deals that would typically last about a year, they’re now asking for two years.

How bad is it really going to be? What’s your outlier worst-case scenario, and then what do you think is a little more realistic?

If you think pre-flood, a mix [of products] that the customers need, the industry had the capacity to ship about 190 million units a quarter. Pre-flood, we expected the demand to be pretty consistent at about 180 million a quarter, with a bump in September 2012 for Windows 8. We now believe the March quarter is going to much more difficult than the December quarter, and December is going to be about 120 million or so. We think the March quarter will be about 120 million, in the best-case scenario. And that’s with customers mixing down pretty aggressively; and by that, I mean companies like Western Digital, who don’t have access to the sliders [a critical component in a drive], are shipping one- and two-headed devices so they can ship more units. So instead of shipping a drive that contains two disks and four heads, which is what the market needs right now, they’ll be shipping a one-disk, one-head or one-desk, two-head product. They’ll be maximizing the units they can sell, rather than shipping the product the customer actually needs. … So we see something like 130 million for March on the optimistic side, and then 150 million for June, 170 for September and then 190 million for December. And so by the end of 2012 you’re back to being close to industry demand. But even then, you’ve not included the impact of that missed 100 million units. And that will take another year to absorb, because it’s not like the industry is building new factories to chase that demand. We can’t over-invest to meet some bubble and then get stuck with excess capacity.

I think, intuitively, people expected companies like Seagate to just build more factories outside of the flood zone, but it’s not that simple, is it? Would this not be a moment to add capacity?

There are some in the investment community who think that’s what is going to happen, and that there will end up being a supply glut after all this is over, but it’s not the case. For us, it’s more a function of how to recover the supply chain and then work with the customer to get a good read on what their needs are for the next several quarters. If we see a multiquarter shortage that goes beyond what I described before, then we would think about maybe putting some capital in place. But we’re not going to do that to solve a temporary problem, because we end up being stuck with the excess capacity. Now if it turns out there is no recovery, and then the industry is more constrained than I first described — and that, by June, the industry is still 30-40 million units short and looks like it will be for the next six quarters — we might revisit. But then we’d want longer-term commitments to make sure we’re not overinvesting. But we’re not to that point yet.

What is this doing to prices? And what does that mean to the person who wants to buy a computer or server this year or next year?

If you look at a 10-year moving average trend, the industry has in general seen prices come down about 2 to 3 percent a quarter, and that is for a particular product. In 2009, there was a little price erosion, and that was because the storage industry recovered quickly from the recession. And there had been massive capital cutbacks, so there were big shortfalls through all of 2009 and into 2010. Then, when the Greece crisis happened, that put a big flatline on a lot of growth, and the industry had put in a lot of capital because everyone expected there would be growth. So, since spring of 2010, the price erosion has been higher than normal, which would show that supply is greater than demand. And what this flood has done is drive the supply curve down, while the demand curve has stayed constant. For OEMs [original equipment manufacturers, or the PC and server manufacturers like Apple, HP and Dell, who buy directly from Seagate], you’re seeing an average increase of about 20 percent, and in the channel [resellers who sell parts to smaller PC and server vendors], probably much higher. So all the sensational quotes you see about pricing are about those that occur in the channel, where we have no control whatsoever.

The markups in the channel are much higher? Are the channel guys taking advantage of this?

Yes, they’re higher, but I don’t think they’re taking advantage. I’ve heard stories about drives that we sell to OEMs for $60 that show up in the channel at $105. Normally the channel price is within about 10 percent of the OEM price. It’s just the law of supply and demand. They can’t get supply. The channel is getting about a third, at most, of the supply they would typically get. The OEMs are the ones with the supply agreements, so everyone in the channel is way short. In some market segments, supply is about 70 percent below what the demand is. And so those shortages are very acute. The channel is selling the few drives that are out there to whoever needs them the most and is willing to pay for them.

So what does all this mean for Seagate, specifically?

For us it’s a different story, because we’re going to be driving more volume than our competitors, because we’re not as directly affected, and we’re going to be making some  technology transitions. When we do that, it lets us take cost out of our product, so we can offer more capacity for the same or fewer parts. That helps us drive down pricing. Our goal is to recapture some of the more aggressive pricing of the last eight quarters, in order to sort of get our business back in balance. Our long-term business model calls for gross margins of 22 to 26 percent. And we use our manufacturing expertise to drive down our costs and then pass that on to our customers. This quarter, end users really won’t see it, because product has been built and has been on the shelves. As the shortages just started occurring, you’re starting to see prices increase in the channel. And then at the OEM there will be shortages in some high-value areas like enterprise storage or cloud computing. You’re going to have to see price increases, because there’s such big shortages.

One thing that occurred to me when I first wrote about this a month or so ago is that it represents an opportunity for the flash memory chip companies to make some inroads against hard-drive guys like you, mainly on notebooks. Is there a threat that flash could pick up some of the demand?

Some of it, but not very much. I think to the extent that there is a high value purchaser who can afford to pay $200 for 100 gigabytes, then that market will expand from 1-2 percent to 3-4 percent. Of the 35 to 40 percent shortage that exists, could you see a little of that get absorbed by silicon? The answer is yes. But there’s a cap. There’s just not enough of a raw supply of silicon to meet all the demand. Our industry will ship 400 exabytes this year. We would have shipped 450, were it not for the floods. Of that, 180 exabytes is notebooks. Reduce that by 30 percent, and you get about 55 or 60 exabytes. If you were to take all of the capacity from Samsung’s newest state-of-the-art flash factory, and dedicated it just to notebooks, it would only put out 7 exabytes a year. Plus, there are already other markets demanding flash, like  tablets and cellphones and other things. So it’s not like you can steal from those other markets. You’re not going to take a $32 product and replace it with a $350 product. Can you do it at the edges of the market? Sure. But the threat is capped by the amount of silicon available and the price point for flash storage, which is still an order of magnitude higher.

The vast majority of servers — including those from H-P — use the chips sold by Intel and AMD that are based on a technology called x86. But HP, which jointly developed Itanium with Intel in the 1990s, continues to use that chip for three lines of large systems used for heavy-duty computing jobs.

Read the rest of this post on the original site »

Earnings per share were $1.17, versus the consensus of $1.13, on sales of $32.3 billion, also slightly ahead of the consensus.

However, the guidance looks weak. HP said it sees fiscal year 2012 earnings coming in at at least $4, well below the consensus of $4.56, and not really even in the “just right” territory that I wrote about this morning.

“We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution,” CEO Meg Whitman said in a statement.

HP shares took a beating today, but so did the rest of the market. HP closed down more than 4 percent at $28.84. The shares are down more than 36 percent since the start of the year.

Here’s the full earnings news release:

PALO ALTO, CA–(Marketwire -11/21/11)- HP

Fiscal 2011 non-GAAP net revenue of $127.4 billion, non-GAAP diluted earnings per share of $4.88 and free cash flow of $9.1 billion grew 1%, 7% and 8%, respectively, over the prior year

Fiscal 2011 GAAP net revenue of $127.2 billion, GAAP diluted earnings per share of $3.32 and cash flow from operations of $12.6 billion

Fourth quarter non-GAAP net revenue of $32.3 billion, non-GAAP diluted earnings per share of $1.17 and free cash flow of $1.2 billion were down 3%, 12% and 43%, respectively, from the prior-year quarter

Fourth quarter GAAP net revenue of $32.1 billion, GAAP diluted earnings per share of $0.12 and cash flow from operations of $2.4 billion

HP today announced financial results for its fourth quarter and full fiscal year ended Oct. 31, 2011.

“HP has a great opportunity to build on our strong hardware, software, and services franchises with leading market positions, customer relationships, and intellectual property,” said Meg Whitman, HP president and chief executive officer. “We need to get back to the business fundamentals in fiscal 2012, including making prudent investments in the business and driving more consistent execution.”

“While FY11 proved to be a challenging year, we grew non-GAAP EPS 7% and generated $12.6 billion in cash flow from operations,” said Cathie Lesjak, HP executive vice president and chief financial officer. “We’re remaining cautious heading into FY12 but are focused on delivering our earnings outlook and driving shareholder value.”

Earnings highlights

—————— —————————— ————————–
Q4 FY11 Q4 FY10 Y/Y FY11 FY10 Y/Y
—————— —————————— ————————–
GAAP net revenue
($B) $ 32.1 $ 33.3 (3%) $127.2 $126.0 1%
—————— —————————— ————————–
GAAP operating
margin 2.5% 9.9% (7.4 pts) 7.6% 9.1% (1.5 pts)
—————— —————————— ————————–
GAAP net earnings
($B) $ 0.2 $ 2.5 (91%) $ 7.1 $ 8.8 (19%)
—————— —————————— ————————–
GAAP diluted EPS $ 0.12 $ 1.10 (89%) $ 3.32 $ 3.69 (10%)
—————— —————————— ————————–
Non-GAAP net
revenue ($) $ 32.3 $ 33.3 (3%) $127.4 $126.0 1%
—————— —————————— ————————–
Non-GAAP operating
margin 9.7% 12.0% (2.3 pts) 10.8% 11.4% (0.6 pts)
—————— —————————— ————————–
Non-GAAP net
earnings ($B) $ 2.4 $ 3.1 (23%) $ 10.4 $ 10.9 (4%)
—————— —————————— ————————–
Non-GAAP diluted
EPS $ 1.17 $ 1.33 (12%) $ 4.88 $ 4.58 7%
—————— —————————— ————————–

Information about HP’s use of non-GAAP financial information is provided under “Use of non-GAAP financial information” below. Unless otherwise specified, all revenue amounts below are calculated on a GAAP basis.

Full year fiscal 2011
GAAP net revenue for the full fiscal year 2011 was $127.2 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. GAAP operating profit was $9.7 billion, and GAAP diluted earnings per share (EPS) was $3.32, down 10% from the prior year.

Non-GAAP net revenue for the full fiscal year 2011 was $127.4 billion, up 1% compared with the prior year or down 1% when adjusted for the effects of currency. Non-GAAP operating profit was $13.8 billion, and non-GAAP diluted EPS was $4.88, up 7% from the prior year.

Fiscal 2011 non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in the fourth quarter in connection with the wind down of HP’s webOS device business, net of fourth quarter webOS device revenue. Non-GAAP earnings and operating profit information excludes after-tax costs of $3.3 billion, or $1.56 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011
For the quarter, GAAP net revenue of $32.1 billion was down 3% from the prior-year period. Non-GAAP net revenue of $32.3 billion was down 3% from the prior-year period as reported and down 6% when adjusted for the effects of currency.

GAAP diluted EPS was $0.12, down 89% from the prior-year period. Non-GAAP diluted EPS was $1.17, down 12% from the prior-year period.

Fourth quarter non-GAAP net revenue includes an additional $0.2 billion of revenue resulting from the exclusion of contra revenue associated with sales incentive programs implemented in connection with the wind down of HP’s webOS device business, net of webOS device revenue for the period. Fourth quarter non-GAAP earnings information excludes after-tax costs of $2.1 billion, or $1.05 per diluted share, related to the wind down of HP’s webOS device business, impairment of goodwill and purchased intangible assets, amortization of purchased intangible assets, restructuring charges and acquisition-related charges.

Fourth fiscal quarter 2011 trends and regional performance
In the Americas, fourth quarter GAAP net revenue was $14.5 billion, down 4% year over year and down 5% when adjusted for the effects of currency. Non-GAAP net revenue in the Americas was $14.6 billion, down 3% year over year and down 4% when adjusted for the effects of currency.

Europe, the Middle East and Africa GAAP revenue of $11.7 billion was down 6% year over year and down 10% when adjusted for the effects of currency. GAAP revenue in Asia Pacific was $6.0 billion, representing a 3% increase year over year, and down 4% when adjusted for the effects of currency.

GAAP revenue from outside of the United States in the fourth quarter accounted for 65% of total HP revenue. BRIC countries (Brazil, Russia, India and China) generated revenue of $3.8 billion, up 9% over the year-ago period, for 12% of total HP revenue.

Revenue in HP’s commercial businesses declined 2% year over year. Revenue in HP’s consumer businesses, within PSG and IPG, was collectively down 9% year over year.

Fourth fiscal quarter 2011 business group results

Services revenue of $9.3 billion grew 2% year over year with a 12.8% operating margin. Technology Services and Application Services revenue grew 3% and 2%, respectively, while IT Outsourcing revenue grew 1% and Business Process Outsourcing revenue declined 2%.

Enterprise Servers, Storage and Networking (ESSN) revenue declined 4% year over year with a 13.0% operating margin. Networking revenue was up 5%, Industry Standard Servers revenue was down 4%, Business Critical Systems revenue was down 23%, and Storage revenue was up 4%.

HP Software revenue grew 28% year over year with a 27.7% operating margin. HP Software revenue was driven by revenue growth in licenses and services of 33% and 36%, respectively.

Personal Systems Group (PSG) revenue declined 2% year over year with a 5.7% operating margin. Commercial client revenue grew 5%, and Consumer client revenue declined 9%. Total units were up 2% with 5% growth in desktop units and 1% growth in notebook units.

Imaging and Printing Group (IPG) revenue declined 10% year over year with a 12.8% operating margin. Commercial revenue was up 4% year over year with commercial printer hardware units up 5%. Consumer printer hardware revenue was down 8% year over year with an 8% decline in units.

Financial Services revenue grew 18% year over year driven by double-digit growth in both lease volume and portfolio assets. The business delivered a 10.3% operating margin.

Asset management
HP generated $2.4 billion in cash flow from operations in the fourth quarter. Inventory ended the quarter at $7.5 billion, with days of inventory up 4 days year over year to 27 days. Accounts receivable of $18.2 billion was up 1 day year over year to 51 days. Accounts payable ended the quarter at $14.8 billion, flat from the prior-year period at 52 days. HP’s dividend payment of $0.12 per share in the fourth quarter resulted in cash usage of $239 million. HP also utilized $500 million of cash during the quarter to repurchase approximately 17 million shares of common stock in the open market. HP exited the quarter with $8.1 billion in gross cash.

Outlook
For the first quarter of fiscal 2012, HP estimates non-GAAP diluted EPS in the range of $0.83 to $0.86, and GAAP diluted EPS in the range of $0.61 to $0.64.

First quarter fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.22 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP expects full year fiscal 2012 non-GAAP diluted EPS of at least $4.00 and GAAP diluted EPS of approximately $3.20.

Full year fiscal 2012 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $0.80 per share, related primarily to the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

In order to more effectively manage HP as one company and align its guidance policy with its long-term objective of delivering profitable growth, HP will only be providing a quarterly and annual earnings per share outlook. The company believes that earnings per share is a better indicator of successful execution across its various business levers. HP remains committed to high levels of disclosure and transparency, including general commentary on its expectations relating to future revenue and business segment performance, and will continue to provide detailed segment-level financial performance data for completed fiscal periods.

More information on HP’s quarterly earnings, including additional financial analysis and an earnings overview presentation, is available on HP’s Investor Relations website at www.hp.com/investor/home.

HP’s Q4 FY11 earnings conference call is accessible via an audio webcast at www.hp.com/investor/2011q4webcast.

About HP
HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure to solve customer problems. More information about HP is available at http://www.hp.com.

It will also be the first earnings release since the infamous fiasco of Aug. 18, when HP shocked investors with a truckload of news: The shutdown of the webOS hardware business, the now-concluded review of strategic options for the PC business, the acquisition of the British software firm Autonomy and a lowering of its revenue outlook.

The consensus of Wall Street analysts calls for HP to report sales of $32.1 billion and per-share profits of $1.16. At that level, sales growth would amount to about 3 to 4 percent on a sequential basis. Which, writes analyst Toni Sacconaghi of Bernstein Research in a note to clients on Friday, is substantially slower than the 8 to 14 percent HP usually grows sales in its fourth quarter.

HP consistently beats the consensus number — 25 of the last 26 quarters, by Sacconaghi’s count — so there’s a pretty good chance the company will do it again, despite an aggressive pricing environment for PCs, economic weaknesses in Europe and headwinds from the effect of currencies. When HP issued profit guidance in August for this quarter — the range was $1.12 to $1.16 a share — it implied that operating margins would be down by about 0.3 percent to up by 0.1 percent. This would be, Sacconaghi writes, the worst quarter-on-quarter change in operating margin since HP acquired Compaq in 2002.

Yet the results for the quarter are almost of secondary concern. All eyes will be on guidance that HP gives for 2012. It must be realistic, but not too low; achievable, so not too high. Guidance that Goldilocks could love — just right. HP has been lowering its guidance all year, but that was under prior CEO Léo Apotheker. The right number for EPS guidance in 2012, Sacconaghi says, is at least $4.25 a share, though he’s estimating HP will finish 2012 at $4.80, which is a reduction from his previous estimate of $5.15.

Also, it should set some clear priorities for capital allocation, Sacconaghi writes. HP took a lot of heat for paying $11.7 billion for Autonomy. Whitman has yet to set the table strategically for HP: Does it need more “transformation”? Or is it a mature company with slow predictable growth targets that routinely gives cash back to shareholders in much the same way IBM does? In choosing the latter, Sacconaghi says, HP could grow sales by at least 2.5 percent a year and per-share profits by 9 to 10 percent a year for the next three to five years.

HP can expect to produce free cash flow next year, in the range of $8 billion to $10 billion. If it were to buy back $4 billion worth of stock, it would reduce the share count by about 7 percent, and thus goose its EPS accordingly. One important signal on this front is the addition of activist investor Ralph Whitworth to HP’s board. Whitworth is likely to advocate the return of cash to shareholders and lean against big acquisitions.

Finally, there are lots of challenges in HP’s individual business units, none of them insurmountable. The printer unit is still recovering from the effects of the earthquake in Japan. Certain high-demand models are running short, yet there’s a lot of lower-demand models in inventory. Sacconaghi expects sales in the unit to drop 6 percent. In services, HP has had some problems delivering profit growth. Expect some explanation around that in the commentary today. In the PC business, expect some explanation of the effects HP is seeing from the flooding in Thailand which is causing a worldwide shortage of hard drives. In the Business Critical Server business, which is where HP sells its high-margin Itanium-based servers, the impact from the ongoing brawl with Oracle is making it difficult to close deals, Sacconaghi writes.

Overall, he insists that HP — despite its troubles over the last year — remains an attractive investment for patient investors. It still leads the market segments it participates in, except services, and still has fair room for growth. Sacconaghi rates HP as “outperform,” and expects it to hit a price of $37.

The document is a routine filing concerning the timing of the trial and the discovery process. In it, Oracle says that what documents it has received from HP confirms what Oracle has been arguing since this whole thing started: That HP and Intel plan to let the Itanium processor die once it has released two more generations, something HP and Intel have both denied. “HP and Intel have a contractual commitment that Itanium will continue through the next two generations of microprocessors …”

Worse, Oracle alleges that the only reason the chip is still available at all is that “HP is paying Intel to keep it going.” It goes on: “HP has secretly contracted with Intel to keep churning out Itaniums so that HP can maintain the appearance that a dead microprocessor is still alive. The whole thing is a remake of Weekend at Bernie’s.”

Why all the trouble over so obscure a chip? Oracle says it’s all about the support fees that Intel charges. HP makes a lot of money, Oracle says, charging for service and support of its HP UX operating system, which runs on the Itanium chip; it loses money when customers move to systems running more conventional x86-based chips. As Oracle puts it in the filing: “HP achieves a far lower “attach rate” (meaning it gets few service contracts) on the operating systems like Linux that are prevalent on servers running x86 microprocessors. Thus when customers migrate to new platforms, HP loses the service contract. This is a multi-billion dollar problem for HP.” It also helps HP remain competitive with IBM and Oracle’s Sun Microsystems business, Oracle argues in a redacted passage.

“These factors led HP to craft a top-secret plan to create a false perception that Itanium still had a future,” Oracle says in the filing. “HP understands that the future prospects of IT products drive customer purchasing decisions. A buyer who knew that Intel saw no future for Itanium, and was only continuing to invest in the line pursuant to a contractual obligation, would devalue the future prospects of Itanium servers and be less inclined to buy.”

“Oracle Sun has been a victim of this, and according to HP’s documents an intended victim. So why is Oracle the defendant in this case? We now understand it is because Oracle’s decision to stop making new versions of its software for the Itanium system was devastating to HP because it undermined the rationale for paying Intel [redacted] to sustain the illusion of a long-term future for Itanium. Oracle had told too much of the truth.”

HP, whose PR team is working equally late, just sent this emailed statement:

Oracle’s latest filing is nothing more than a desperate delay tactic designed to extend the paralyzing uncertainty in the marketplace created when Oracle announced in March 2011 — in a clear breach of contract — that it would no longer support HP’s Itanium platform. The fact remains that Oracle’s decision to cut off support for Itanium was an illicit business strategy it conjured to try to force Itanium customers into buying Sun servers, and destroy choice in the marketplace. This filing is just the latest in its ongoing campaign to shore up its failing Sun server business and starve thousands of existing Itanium customers who rely on their Itanium processors for mission-critical activities.

As Oracle well knows, HP and Intel have a contractual commitment to continue to sell mission-critical Itanium processers to our customers through the next two generations of microprocessors, thus ensuring the availability of Itanium through at least the end of the decade. HP is resolved to enforcing Oracle’s commitments to HP and our shared customers and will continue to take actions to protect its customers’ best interests. It is time for Oracle to quit pursuing baseless accusations and honor its commitments to HP and to our shared customers in a timely manner.

Intel spokesman Chuck Mulloy had no comment, saying Intel is not a party to the lawsuit, and doesn’t comment on confidential agreements it may or may not have with other companies. Intel CEO Paul Otellini has said in the past the Intel has a long-term roadmap for Itanium that goes beyond the next two generations already disclosed.

Since this whole episode first erupted in March, and escalated into a lawsuit in May, I’ve called it a very public fight about a very obscure chip. Oracle, perhaps looking for something new to fight with HP about, said it would cease developing software created for systems using Intel’s Itanium chip, arguing that it looked like it was going to be retired in the near-ish future. HP, which is the only server vendor worth mentioning that sells Itanium-based systems, was horrified, as was Intel, if for no other reason than they spent a decade or two developing it in hopes it would be the superchip of the future.

Then the future arrived, and it didn’t quite turn out that way. Intel rival Advanced Micro Devices found a way to do 64-bit computing that the marketplace liked better, Intel ultimately embraced the same method for mainstream server chips, and Itanium went on to be a specialized niche product. However, those who use it are a vocal bunch. Some of them petitioned Oracle to change its mind. It hasn’t budged.

So now you know the background. The original filing is embedded below, via Scribd. The best parts are in the first several pages. Happy reading.

Oracle Itanium Filing: “Weekend At Bernie’ss

Fusion-io shares closed at $38.10 — up 9.17 percent — during the regular session, and continued to climb by an additional 1 percent in after-hours trading. The shares have increased by more than 100 percent since they debuted on the New York Stock Exchange at $19 early this summer.

The main news came in the form of a new product, and the publication of news that Fusion-io technology was used in a high-performance computing project at the Lawrence Livermore National Lab.

People tend to think of Fusion-io as building traditional storage, but its main mission is to get data closer to the processor in a server, so that that processor doesn’t have to sit around waiting. Processors are super speedy and super impatient. Think of the processor as the impatient Miranda Priestly — played by Meryl Streep in “The Devil Wears Prada” — and how Anne Hathaway’s character, Andy Sachs, is never fast enough for Priestly about handing her something she needs right away. Microprocessors hate nothing more than waiting for a hard drive to serve up the data they need.

Fusion-io’s drives try to speed that process up — and make microprocessors happier — by using flash memory built into an insert card and installing it close to the processor in a system. The news, announced at the Supercomputing conference in Seattle today, is that Fusion-io debuted a 10 terabyte version of its high-end ioDrive Octal product. You can now pack four of these into a single server, and have 40 terabytes of data right up close to those impatient processors. Companies like Hewlett-Packard, IBM, Dell and Supermicro build Fusion-io’s products into their own products.

The other news also had a supercomputing wrinkle to it. A machine that Lawrence Livermore called “Leviathan,” packed with Fusion-io cards and Intel processors, broke a record in processing a graph with more than 68 billion nodes. Well, it didn’t just break the record, it shattered it, as that number of nodes in a graph is four times the prior record. What that means, in English, is that the computer plotted a mathematical graph with more than 68 billion points of data.

Apparently — and I’m just learning this now — there’s a separate version of the Top 500 list called the Graph 500 which focuses on simulating 3-D problems.

It’s a lot to take in, but the main point is that Fusion-io seems to be showing that it has a going business. Critics of the company have argued that it relies too heavily upon its biggest data-center customers like Facebook and Apple, and that it will be vulnerable to slowing sales when those companies are through building their infrastructure. The problem with that argument is that there’s always another impatient processor throwing an impatient diva fit while waiting for data.

Also, I should note that today’s 9 percent move comes after Fusion shares fell about the same amount on word last week that the company is planning a $350 million secondary offering. When investors heard about that last week, they sent the shares plunging by more than 8 percent, territory it has since reclaimed. It has been a bumpy, volatile ride for Fusion-io, no doubt. In the five months since the debut, the stock has traded as low as $15, and almost as high as $40. That’s IPO investing for you.

The company’s troubles aren’t anything you couldn’t intuitively guess: Consumer PC sales are weak for a variety of reasons, ranging from the popularity of tablets like the iPad to a frail consumer economy, combined with slumping sales to state and local governments facing squeezed budgets. Dell’s strengths: Sales of PCs and servers to enterprises and the federal government.

Even with weaker sales, that mix should allow Dell’s profits to hold up. Whitmore writes in a note to clients: “We expect solid margins due to favorable product mix — healthy corporate demand and softer consumer demand — benign commodity prices and greater contribution from Dell’s higher margin Storage and Server offerings.” Memory chip prices are down by 17 percent and LCD display prices are down 3 percent, giving Dell a little wind at its back from a cost perspective, and possibly offsetting the expected impact from a shortage of hard drives caused by the flooding in Thailand.

Whitmore expects Dell to report sales of $15.6 billion and margins of 22.2 percent, and an operating margin of 7.2 percent, implying per-share profits of 44 cents. Whitmore’s estimates are slightly below the consensus view of analysts’ calls for Dell to report earnings per share of 47 cents on sales of $15.7 billion.

Looking ahead, Whitmore expects Dell to emphasize an ongoing cycle of upgrades to corporate PCs and servers. He expects estimates for the 2012 fiscal year could improve, because right now they “appear conservative.”

Patrick Moorhead, AMD’s corporate VP for strategy and an AMD Corporate Fellow, is leaving the company, and according to people familiar with his plans, will be launching a consumer-focused technology analyst and consulting firm around the time of the International Consumer Electronics Show in Las Vegas in January.

Moorhead is the last remaining VP been hired by AMD’s legendary founder and former CEO, Jerry Sanders. Over 11 years at AMD he led the company’s marketing efforts around its Athlon PC and Opteron server chips that led to a bit of a renaissance at AMD from about 2005 to 2007, when the chips won a lot of business away from Intel and thus gave the bigger company a major migraine headache.

To place Moorhead (pictured from his Twitter feed) appropriately in AMD’s history, it was during these years that AMD put into products a concept called x86-64, which essentially extended the x86 instruction set — the underlying code that chips from Intel and AMD share — into what was then the bright new world of 64-bit computing, thus paving the way for machines that could contain more than two four gigabytes of memory and could handle more complex computing tasks.

AMD first put forth its approach at a chip industry event in 1999 — one that I happened to cover for a now-defunct outlet called Electronic News — at a time when Intel was championing a different approach to 64-bit computing by starting from scratch with an entirely new design. Its technology was called EPIC, for “explicitly parallel instruction set computing.” The product that eventually resulted was the exotic Itanium chip, which is today the subject of a legal dispute between software giant Oracle and Hewlett-Packard, which is for all intents and purposes the only company selling hardware that runs on Itanium.

AMD ultimately won that argument and Intel embraced its own implementation of AMD’s x86-64, now common in their mainstream desktop, notebook and server chips, but only after giving Intel and its investors fits over lost market share during 2005 and 2006.

Moorhead joined AMD in 2000 from Compaq and had also worked at the not entirely forgotten search engine outfit AltaVista, which had been launched at Digital Equipment Company, then acquired by Compaq, and is now part of Yahoo.

In more recent years he had been known primarily for being an outspoken advocate for the opportunities in mobile computing. One suspects he’ll have more to say on that topic in the coming months.

Now we call them blade servers, and today they account for about 15 percent of the world’s servers, with vendors as varied as Hewlett-Packard, IBM, Oracle and Fujitsu.

But the fundamental problems facing those who buy servers in large quantities remain the same: Technology demands more computing cycles, which servers with ever more powerful chips can certainly deliver, but companies have limited space to put them, limited power resources to run them and cool them, and limited ability to pay for it all.

Today Hewlett-Packard aims to change the discussion about the future of servers with something it calls Project Moonshot. The idea is pretty straightforward: Cram 2,800 servers into a single rack that would today house a few dozen, or at most 128, blade servers. Make them all share the same internal networking, cooling and power supplies and generally boost the number of servers that can fit into a defined space. One way or another, more efficiency is badly needed, and as Parthasarathy Ranganathan, a Fellow at HP Research I talked to yesterday, told me, the time has come to stop trying to squeeze “blood from a stone” in order to get it, but rather do something more radical.

The headline that everyone is paying attention to is that HP has selected an ARM-based chip from a Texas-based start-up called Calxeda as the chip it will use in its development platform, called Redstone. ARM, as you know, is a flavor of chip technology designed by the British firm ARM Holdings that’s widely used in mobile phones because it is very power efficient. ARM has recently started to make some inroads into general-use personal computing against the Intel- and AMD-based world of x86 computing.

But it’s less important to focus on the chips that HP is using here than on the fundamental shift that HP is trying to create. “We’re not trying to start a new chip war,” Glenn Keels, HP’s director of marketing for HP’s Hyperscale business, told me. There’s no reason that Intel’s Atom chips couldn’t one day be just as suitable for this. Make no mistake, though: ARM chips are coming to servers, one way or another.

Aside from the Redstone development platform, HP also aims to let potential customers kick the tires of the Redstone-style servers by running their applications on them and seeing how they perform versus traditional servers in a series of development labs that the company will open around the world. The first will be in Houston, and it will open in January. More will follow next year in Europe and Asia.

HP also named a handful of partners that are participating in the Moonshot project by contributing hardware, software and technical expertise. Among them are AMD; Canonical, the company behind the Ubuntu flavor of Linux; and Red Hat, the enterprise Linux company. It all looks very interesting, and if HP can nudge the industry in a direction where millions of servers packed into data centers can consume significantly less energy than they do now, everyone should be happier. The benefits would be the increased availability of computing power at a lower cost, with less relative energy consumption and therefore less impact on the environment. It’s hard to argue with any of that.

Here’s an HP video explaining what Project Moonshot is all about.

(Image is the cover of an extremely inaccurate 1959 children’s book imagining what a routine flight to the moon might be like for a 6-year-old boy.)

Now that new HP CEO Meg Whitman has decided to keep the PC business rather than spin it out as her predecessor Léo Apotheker had proposed, HP appears to be heading back, however slowly, toward the kind of stability for which it had long been known.

But can it still perform? Bernstein Research analyst Toni Sacconaghi took the opportunity to examine the company’s business units and finds that, yes, the prospects for growth aren’t unreasonable. The current portfolio of HP’s business, he estimates, is likely to grow its sales organically by a combined 2.5 percent on an annual basis going forward. Add to that additional growth from the planned shifts toward higher-margin IT service, networking and software businesses, and the picture gets brighter, Sacconaghi writes in a note to clients issued yesterday. HP, he argues, should be able to grow its per-share earnings by 9 to 10 percent annually over the next three to five years.

Part of his assumption is that HP uses about $4 billion of its $8-$10 billion in annual free cash flow for share buybacks, which will help goose earnings on a per-share basis by reducing the number of outstanding shares; plus another $3 billion annually for acquisitions, buying companies at reasonable multiples of about five times revenue.

So how does each sector of HP’s business look?

PCs: Sacconaghi reckons that the global market for PCs will grow about 6 percent a year on a unit basis, down from historical averages of about 10 percent, and that it will grow on a revenue basis by about 2 percent a year through 2015. As the biggest supplier of PCs in the world, HP will, at the very least, hold its market share. While PCs are HP’s largest business, accounting for $40 billion in its last fiscal year and about one-third of its overall sales, the unit generates only 13 percent of operating profits. And, yes, while tablets are a threat, Sacconaghi sees no reason that PCs and tablets can’t grow together. The increasing need for an Internet connection everywhere and the increasing amount that consumers are willing to spend on technology, coupled with price declines over time, mean that consumers will be willing to spend more on notebooks and tablets.

Printers: As with PCs, HP is the market leader in printers, and as that market grows its revenue by about 3 percent a year, HP will probably hold on to its share of the market. Tablets may have a long-term impact on printing behavior, but Sacconaghi argues that consumer behavior tends to change slowly. A decade ago, he says, investors worried that email and the paperless office would kill printing. “Despite these ostensible headwinds, HP and Lexmark collectively grew their supplies revenues by 7 percent per year between 2000 and 2010, driving low to mid single digit growth for the printer industry.” HP’s printer division accounted for $25.8 billion in revenues in the last fiscal year, or about 20 percent overall, and because of its 17 percent operating margin, delivered 29 percent of the company’s profits. It’s a classic razor blade business, as HP loses between 20 and 25 percent on the printing hardware, only to make it up on supplies that command a 60 percent margin. The presence of tablets could actually boost printing, and thus increase the sale of those supplies down the road. Overall, the printer business should continue to grow at about 3 percent a year, Sacconaghi says.

Enterprise, servers, storage and networking: Sacconaghi expects HP to grow revenues in the ESSN unit by about 2 percent a year, slightly below the industry growth rate of 3 percent. He bases this on the expectation that HP can grow its networking business, hold its market share in the Intel-based servers, and lose share in its enterprise storage business to players like EMC and NetApp, and also lose share in the Unix storage business because of Oracle’s decision not to support the Itanium chip.

Services: This unit should grow by about 2 percent annually, slower than the market, which is growing at 4 percent. “We believe that outsourcing is a maturing business, and that EDS, which HP purchased in 2008, is and was an underperforming asset,” Sacconaghi writes. “As a result, we forecast HP’s outsourcing revenues to remain flat.” Expect it to grow in line with the enterprise hardware business, and along with the consulting business.

Software: The market research firm IDC expects the end markets for HP’s software to grow by 7 percent a year. If you assume that HP makes more software acquisitions, which Sacconaghi does, then you can reasonably predict its software revenue will grow by 10 percent a year.

So what’s the risk to all this? Leadership. “Ultimately, our projections for HP are predicated on the company choosing a disciplined financial approach to running the company that includes modest revenue growth, small and leverageable acquisitions, a strong operations focus, and high returns of capital to shareholders,” Sacconaghi writes. The last two CEOs who tried to “transform” HP — Carly Fiorina and Léo Apotheker — failed.

HP’s isn’t “broken,” but in fact offers a favorable risk for patient investors, Sacconaghi says. He rates HP shares as an “outperform,” with a price target of $37.