HP's Unix revenues hit by K-Class server production problems

Hewlett Packard (HP) suffered disastrous fourth quarter Unix sales after a double whammy of production problems meant that it failed to ship any of its crucial K-class midrange servers during the whole of December.

The hardware vendor?s supply of K-Class servers, which typically cost between $100-500,000, was cut off after it discovered it had failed to order enough Sram memory chips, which it buys from IBM, to meet demand.

It also found that one in 1,000 system boards were failing electrical tolerance tests at a key production plant in Puerto Rico. While this may not seem like many, a spokesperson said it was enough to require the halting of production, while the potentially faulty boards were tracked down and new testing procedures introduced.

Ironically, HP said the problems were exacerbated by a rise in demand for the machines, but the extent of the damage caused by the problems only emerged this week as analysts revealed fourth quarter figures.

Kirsten Ludvigsen, an IDC analyst, said: "HP had tremendous production troubles in the fourth quarter and delivered only about 25 per cent of the expected amount of the popular K580 [for example]. Once production problems are over, it is believed it will go strongly ahead again."

According to IDC?s figures for Western Europe in the high end server market - which means machines that cost more than $250,000 - HP?s market share was halved last quarter compared with the previous year. It also experienced negative revenue growth of more than 43 per cent quarter on quarter, dragging total growth rates for the whole of 1998 down to only 5.6 per cent.

This compares with IBM?s 18.8 per cent annual revenue growth rate and Sun Microsystems?48 per cent. HP is also likely to have been hit at least as badly in the under $250,000 section of the market where the K-class is a top performer. Overall, HP generates between 60-70 per cent of its total Unix hardware sales from the system.

Nick Earle, HP?s marketing director, admitted that although orders still remained on the books ? which means revenues could still be accrued this quarter - some orders may well have been lost because of the delay.

"It was not good at all," he said.

To make matters worse, he could not guarantee that affected models had not shipped, but said, in the unlikely event that a board failed, no corporate data would be affected.

Although HP is believed to have received some complaints from users about the delays, Earle refused to name any affected parties. Instead, he said that all the production problems had been solved and the machines had started shipping again by January.

But the production issues have only compounded HP?s existing difficulties in this sector, with users either delaying their K-class buying decisions or expecting major discounts because the system is being replaced in May by the Prelude server. Users will need to swap their boxes out completely to upgrade to the new machine.