Hewlett Packard Enterprise Earnings Preview: What We Are Expecting?
As we have noted, Hewlett Packard Enterprise (NASDAQ: HPE) is comprised of the HP’s erstwhile Enterprise hardware businesses (servers, storage, and networking), the software business, HP Services, and the Financial Services business. HPE is set to declare results for the first fiscal quarter ended January 31, 2016 on Thursday, March 3rd. [1] We expect that the revenue growth for the company in Q1FY16 will continue to remain tepid as the underlying industries for the respective divisions continue to experience weak demand from various geographic regions, especially Europe. In this note, we discuss the factors affecting each division.
We are in the process of updating our financial model to reflect the change in business operations (split of company into HPQ and HPE) based on the financial statements of the standalone entity.
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Enterprise Group
The enterprise group is comprised of the Industry Standard Servers (ISS), Business Critical Systems and Storage. While the company continues to witness demand for its industry standard servers (ISS) from tier 1 service providers, the business critical systems revenue is declining as Enterprise Unix workloads continue to migrate to cheaper platforms. These to a degree include ISS systems, though increasingly enterprise computing is being deployed to the massive dense data center systems of the largest Cloud computing providers. Still, HP’s ISS revenues continue to do well due to double-digit increases in ISS’s ASPs. We expect this trend to continue in Q1, and the company to report marginal increase in overall revenues for the server division
Storage revenue continues to suffer from the cyclical decline in demand from enterprise companies, while SME demand continues to drive revenue for smaller vendors. This trend will continue to impact revenue growth for HP in Q1. However, HP’s Aruba Network acquisition is expected to provide most of the upside for the storage revenues during the Q1 results.
Enterprise Services division
Enterprise services division consists of infrastructure technology outsourcing and application business services (ABS). The revenues for this division is expected to decline as account runoff (contract completion) for the company continues. However, the company was able increase new signings in the last quarter that usually have a duration of over one year, and this should augur well for the company in the coming quarter. Additionally, we expect the division to post higher margins as the company continues to pursue and secure higher margin contracts.
Software Division
HP’s software division is in transition as the company continues to shift in its portfolio and operating model to SaaS and subscription-based offerings. We expect this transition will be reflected in Q1 results and thus estimate that license, support and professional services revenues declined. However, since HP continues to reporte double-digit revenue growth in its cloud, security and big data services, we believe that cloud services will be the biggest new revenue source for HP in Q1 and FY2016.
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