Hewlett Packard Enterprise is in Sin City this week, holding its annual customer and partner event (HPE Discover 2017), accompanied with the usual flurry of product announcements and preceded by another troubling financial report. HPE’s Meg Whitman, President and Chief Executive Officer, believes the company is heading for an upswing, “accelerating out of the turnaround”, according to a recent interview.
“I can feel it,” she said. “It is just smarter, easier, simpler. You cannot underestimate the accountability. There is nowhere left to hide at this company. I see a perfect place. There is nowhere left for partners to hide. There is no place for HPE employees to hide. It just makes things far easier and, frankly, more fun because you can get stuff done faster.”
Faster, maybe, but better? HPE’s commodity hardware businesses and primary revenue generators — servers, storage, and to a lesser extent, networking — all took hits in the most recent quarter, with the to-be-expected impacts on revenues and margins. Second quarter FY17, announced on May 31, included a 13% year-over-year drop in GAAP net revenue ($7.4 billion vs $8.5 billion), and a more than 50% drop in GAAP operating margin (2.4% vs 2016’s 5.3%).
While Whitman is predicting a speedy upturn, the current performance is not reassuring:
-Enterprise Group revenue was $6.2 billion, down 13% year over year, down 7% when adjusted for divestitures and currency, with an 8.8% operating margin;
-servers revenue was down 14%;
-storage revenue was down 13%; and,
-networking revenue was down 30%.
Overall IT spending is expected to inch up 1.4% this year, to $3.5 trillion, with the datacenter segment pegged at a very anemic 0.3% growth. “We are seeing a shift in who is buying servers and who they are buying them from” said John-David Lovelock, research vice president at Gartner. “Enterprises are moving away from buying servers from the traditional vendors and instead renting server power in the cloud from companies such as Amazon, Google and Microsoft. This has created a reduction in spending on servers which is impacting the overall data center system segment.”
Vendor revenue for the global server market declined 4.6% to $11.8 billion in 1Q17, but HPE took a much bigger hit, with a 15.8% YoY decline in sales. Second-place Dell — 20.1% vs HPE’s 24.2% market share — grew its revenues 4.7%, while Cisco, IBM, and Lenovo were statistically tied for third place, and all saw revenue declines (3%, 34.7% and 16.5%, respectively).
Storage was worse. 4Q16 enterprise factory revenue was down 6.7% YoY, to $11.1 billion, with Dell holding down top spot, courtesy of its EMC acquisition, and with HPE tied with IBM and NetApp for second place (10.2%, 10.1% and 10.0% of market share, respectively). The worldwide Ethernet switch market increased 3.5% in 4Q16, in a market dominated by Cisco (53% market share) and where HPE saw its revenues drop 2.2%, and its market share fall from 5.5% to 5%. Results were better for the enterprise WLAN market, which grew 3.1%, but second-place Aruba-HPE (13.5% in 4Q16, down from 14.3% in 3Q16) experienced a revenue drop of 8.1%, vs a 0.2% decrease from Cisco (43.6% in 4Q16, down from 43.7% in 3Q16).
During the earnings call (Seeking Alpha) Whitman noted that the company had “delivered results in line with our outlook, but just as important, we also have shown growth in key areas that portend well for HPE’s future.” She also identified “opportunities to optimize the business, streamline processes and reduce costs”, and announced plans to “take out another $200 million to $300 million in cost” in the second half of the year.
“I am now laser-like focused on what is the future of Hewlett Packard Enterprise’s financial architecture, how do we simplify, how do we re-engineer the processes and how do we take out overhead given that we are now a $28 billion company, down from $110 billion just five years ago,” Whitman said. Patrick Moorhead, principal analyst with Moor Insights & Strategy, said he believes that by fiscal 2018, HPE’s balance sheet will be cleaned up, after all the major changes — i.e. acquisitions such as flash-storage vendor Nimble Storage and hypercovergence player Simplivity, and spin-mergers in services and software — it has gone through this year.
Technology Business Research analyst Stephanie Long agreed that this appears to be short-term pain for better positioning for long-term gain. ‘While acquisitions greatly enhance HPE’s existing infrastructure portfolio and position HPE well to address evolving infrastructure demands, and spin-merges sharpen HPE’s infrastructure focus, this high degree of change in a short time span hindered revenue performance. However, TBR believes HPE is focused on the long term, and recognizes the near-term challenges such massive portfolio changes will create.’
Dumping $82 billion/year in revenue is apparently a lot harder to do than taking the Dell route, and growing from $25 billion to $75 billion in annual revenues via the $60-billion EMC acquisition. While HPE has been struggling financially for a number of quarters — and sending out mixed strategy/direction messages for a lot longer — HPE Strategy Clear As Mud — Dell is a leader in 15 of Gartner’s Magic Quadrants, is the largest enterprise storage vendor, is the third largest PC vendor, and unlike many of its competitors, is growing market share and increasing ASPs.
Businesses will “live or die” based on how they adapt to a world in which everything is connected and “everything computes,” said Whitman in her Discover keynote. “We see it over and over again: outstanding business outcomes occur when you combine the right mix of breakthrough innovations with the right experience at the right time. A world where everything computes comes with tremendous opportunities and challenges.”
HPE has gone through some rapid and massive changes, in size and direction. According to the company the heavy lifting is done, and now it’s time to reap the rewards.
“HPE is betting on [being] smaller, while a rival like Dell is betting on [getting] bigger,” said Forrester Research analyst Glenn O’Donnell just prior to last year’s software spin-merge announcement. “The market will determine which one wins.”
HPE’s customers and competitors, partners and prospects — and more than a few shareholders — are all watching closely. There is nowhere to hide; now the company must start to deliver on its promises.
The Fiddly Bits (& Bytes)
The company announced, sort of, its new line of servers with the industry’s first silicon-based security (shades of Intel and McAfee), a ‘silicon root of trust – a unique link between the custom HPE silicon and the HPE Integrated Lights Out (iLO) firmware to ensure servers do not execute compromised firmware code.’ As well, it unveiled expanded capabilities for HPE Synergy, the company’s composable infrastructure offering, and HPE OneView, its software-defined intelligence that automates complex tasks, and the availability of the HPE SimpliVity 380 hyperconverged appliance. The ‘sort of’ is because the HPE ProLiant Servers, HPE Synergy Compute Modules and HPE Converged System, are expected to be available in the summer.
It also announced an addition to its location-based services portfolio, Aruba asset tracking, which is available now, and the Aruba 8400 Core Switch Series, the Aruba 2930M Switch Series targeted at wireless LAN and IoT integration, and the industry’s most advanced operating system, ArubaOS-CX.
DISCLAIMER: HPE did not look after airfare and hotel, but it, along with some of the companies mentioned in this article, are in my investment portfolio (at least for the immediate future).