HPE Earnings Preview: Revenue To Decline In the First Quarter

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Hewlett-Packard Enterprise (NYSE:HPE) is set to release its fiscal Q1 2017 earnings on 23rd February. [1] While the company continues to scale back from non-core verticals, its focus on rolling out and building its core portfolio of services for the hybrid cloud infrastructure has intensified. In this earnings release, we will continue to monitor the growth in its enterprise group revenues, which is composed of servers, storage and converged solutions. Furthermore, we will be monitoring the company’s progress in its ongoing restructuring efforts.

Enterprise Group To Report Another Quarter Of Decline In Revenues

According to Trefis estimates, the Server & Storage businesses, which makes up the Enterprise Group vertical, accounts for close to 34% of HPE’s total valuation. HPE continues to lead the enterprise server market and, through the launch of new products, has kept the competition at bay for more than five years. While server revenues continued to decline in Q3, [2] HPE continues to maintain its lead with a market share of 25.9%, compared to second-ranked Dell’s share of 17.8%.

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A slowdown in hyperscale data center growth and the continued drag from declining high-end server sales have impacted server sales in 2016. Additionally, white-box servers that are manufactured to design by low-cost Asian players have claimed a greater share of the market. This has negatively impacted HPE the most, and we expect this slowdown will be reflected in HPE’s shipments and revenues. Still, HPE has leveraged its technological leadership fairly well in defending its market position.

With regard to the other businesses in this group: storage revenues declined by over 5.8% in fiscal 2016 as the contraction of the company’s legacy portfolio continued in the year. However, growth in revenues from 3PAR solutions, which caters to small and medium-sized businesses, has offset that decline. The higher-margin converged storage portfolio was up 1% and now accounts for 55% of the total storage mix. The business environment in storage remains challenging amidst consolidation, and we believe that HP’s external enterprise storage revenues will decline in Q1. 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 Q4 as the company realigns and invests in cloud services.

Enterprise Services Revenues To Post A Decline Amidst Improving Profitability

The Enterprise Services division makes up nearly 39% of our estimated valuation for HPE. HPE’s Infrastructure Technology Outsourcing (ITO) and Application and Business Services (ABS) have been under pressure as competition in the underlying industries has 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, which we expect to continue with the Q1 report. However, the corrective steps taken by HPE to merge this business with CSC in the future should help it to improve its cost structure and realize better cash flows in the future. We expect the company to report the progress it has made regarding this merger on the upcoming earnings call.

Software-Defined Hybrid Infrastructure to Offset the Decline In Software Revenues

HPE’s software business is largely made up of legacy systems and applications associated with its Business-Critical systems platforms, and more recently-acquired software businesses including Autonomy. In September 2016, the company announced that it was spinning off and merging its non-core software assets into Britain’s Micro Focus International Plc (MCRO.L).

Most of the company’s customers are now opting for the cloud-based Software as a Service (SaaS) model. We expect that HPE will continue to report declines in on-premise software, with high single-digit declines 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 post marginal growth in HPE’s SaaS revenues. Nevertheless, HPE likely will post a decline in revenues for its software division during the first quarter of 2017.

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Notes:
  1. HPE investor relations []
  2. Worldwide Server Market Revenue Declines 7.0% in the Third Quarter Amidst Softened Enterprise Demand, According to IDC, November 30 2016 []