HPE Earnings Preview: Decline In Revenues Expected To Continue

by Trefis Team
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Hewlett-Packard Enterprise (NYSE:HPE) is set to release its fiscal Q2 2017 earnings on Wednesday, May 31. [1] In the last three months, the company successfully spun off HPE Enterprise Services into a newly formed entity called DXC Technology. While this might help the company to focus on high-end enterprise hardware and customer services in the long term, we expect that the company will continue to post declines in revenues as the competition in underlying industries hinder revenue growth. The company continues to build its core portfolio of services for the hybrid cloud infrastructure to bolster its revenues. 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 Revenue Declines

According to Trefis estimates, the Server & Storage businesses, which makes up the Enterprise Group vertical, accounts for close to 24% of HPE’s total valuation. While HPE continues to lead the enterprise server market through the launch of new products, the server revenues have declined in line with the overall decline in servers. [2] Although HPE continues to lead in the industry, its share has declined to 23.6% in Q4 2016.

The decline in revenues was due to multiple factors such as a slowdown in hyper-scale data center growth and a decline in high-end server sales. Additionally, the decline in branded server market has been accentuated by the rise in market share of white-box servers that are manufactured to design by low-cost Asian companies. We believe that this slowdown will be reflected in HPE’s shipments and revenues for the quarter. Still, HPE has leveraged its technological leadership fairly well in defending its market position.

The storage division revenues are also reports under the Enterprise group umbrella. This division reported 5.3% decline in revenues in 2016 as the contraction of the company’s legacy storage portfolio continued during the year. However, growth in revenues from 3PAR solutions, which caters to small and medium-sized businesses, has offset the decline in storage revenues to some extent. Despite the increase in revenues from hybrid storage, the business environment in storage remains challenging amidst consolidation. We believe that that HP’s external enterprise storage revenue will continue to decline in Q2.

Technology Services Revenues To Remain Tepid For Q2

The Technology Services division makes up nearly 12% of our estimated valuation for HPE. This vertical has been under pressure as competition in the industry has been intense and 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 Q2 report. However, the inorganic revenue growth can help the company to offset the decline in organic revenues. Despite this, we expect that the revenue growth for the vertical will remain tepid during the quarter.

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.

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 should 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 second quarter of 2017.

Networking Revenues To Decline

The networking division makes up nearly 5% of HPE’s estimated value. HPE’s networking revenues have declined by over 15% in 2016. We believe that the challenging business conditions and currency headwinds will continue to impact growth in networking revenue for the quarter.

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Notes:
  1. HPE investor relations []
  2. Worldwide Server Market Revenue Declines 4.6% in the Fourth Quarter Amid Continued Softened Enterprise Demand, According to IDC, March 1 2017 []
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