HPE Earnings Preview: Revenue Decline To Continue In Q4

by Trefis Team
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Hewlett-Packard Enterprise (NYSE:HPE) is set to announce its fiscal Q4 results on Tuesday, November 22nd. (Fiscal years end with October.)  Trefis expects that revenues declined for the Enterprise Group, which includes Industry Standard and Business Critical Servers, Storage and Networking Equipment, and Technology Services unit. Additionally, Trefis believes that revenues for the soon-to-be-divested Enterprise Services, which includes infrastructure outsourcing and application and business services, will continue to decline by middle single digits. Trefis also expects steeper double digit declines in the recently sold Software segment. In aggregate, we expect the company to report mid single-digit decline in revenues for the quarter.

Enterprise Group Revenue To Decline

HPE is the leader in the enterprise server market and has kept the competition at bay for more than five years. While server revenues continued to decline in Q2, [1] HPE continues to maintain its lead (in terms of revenues) , with a market share of 25.4%, compared to second-ranked Dell’s share of 19.0%. With the advent of Cloud computing, white-box servers that are manufactured to design by Asian ODMs have claimed an increased share of the market. This has negatively impacted HPE the most as its shipment have declined by 18.7% to 474,803. [2] Furthermore, rebranding of HP China to H3C has also negatively impacted shipment numbers as these numbers are not combined. Still, HPE has leveraged its technological leadership pretty well in defending its position in the industry.

With regard to the other businesses in this group:  Storage revenues have declined in the last two quarters. However, growth in revenues of 3PAR solutions, which caters to small and medium sized companies, has aided the company to offset the decline. The business environment in storage remains challenging amidst consolidation. As a result, Trefis believes that revenue for HP’s external enterprise storage will decline in Q4. Moreover, challenging business conditions and currency headwinds will continue to impact growth in networking revenue. Additionally, the technology service, which includes virtualization, cloud deployment and security, is expected to grow marginally in the Q4 as the company realigns and invests in cloud services for this division.

A culmination of aforementioned factors in the underlying industries would result in the company to post a decline in overall topline for the enterprise group division during the quarter.

Enterprise Services Revenue To Decline

HPE’s Infrastructure Technology Outsourcing (ITO) and Application and Business Services (ABS) have been under pressure as competition  in the underlying industries have been relentless. Many of HPE’s competitors have the resources and size to undercut the pricing offered by HPE. As a result, the revenue growth for this segment has suffered. We expect that this division will continue to report decline revenue with the Q4 report. However, the corrective steps taken by HPE to merge this business with CSC in the future should help the company to improve its cost matrix and realize better cash flows in the future.

Software Revenue To Decline Even As Shift To Cloud Continues  

HPE’s software business is a miscellany of legacy systems and applications associated with its Business Critical Systems platforms and more recently acquired software businesses including the troubled Autonomy acquisition. In September, the company announced that it was spinning-off and merging its non-core software assets into Britain’s Micro Focus International Plc (MCRO.L) as HPE’s software revenues have witnessed double-digit decline.

Most of the clients are now opting for cloud-based Software as a Service (SaaS) model. We expect that the HPE will continue to report decline for on-premise software, with high single digit decline in licensing, support and professional services revenues. However, the company continues to focus on building its competencies for software defined hybrid infrastructure services. This would help the company to post a marginal growth in HPE’s SaaS revenues. Nevertheless, HPE likely will  post a decline in revenues for its software division during the fourth quarter.

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Notes:
  1. Worldwide Server Market Revenue Declines 0.4% in the Second Quarter, Awaiting Imminent Hyperscale Buildouts, According to IDC, September 14 2016 []
  2. Gartner Says Worldwide Server Revenue Declined 0.8 Percent in the Second Quarter of 2016, While Shipments Increased 2 Percent, September 14 2016 []
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