HPE: Out of the Fire or Still in the Frying Pan?

HPE has just released its third quarter results. It has finally given its investors something to do a little jig to, having managed to beat expectations for revenue and earnings per share as well as achieving a small year over year revenue growth.

The headline numbers are as follows:

  • Third quarter net revenue of $8.2 billion, up 3% from the prior year’s third quarter, and up 6% when adjusted for divestitures and currency
  • Future HPE (excludes software) revenue up 6% year over year when adjusted for divestitures and currency
  • Third quarter GAAP diluted net earnings per share of $0.10, above the previously provided outlook of ($0.02) to $0.02 per share, due primarily to a non-cash income tax benefit related to its Enterprise Services spin-merger
  • Third quarter non-GAAP diluted net earnings per share of $0.30, above the previously provided outlook of $0.24 to $0.28 per share
  • Updated fiscal 2017 GAAP diluted net earnings per share outlook to ($0.11) to ($0.07), and fiscal 2017 non-GAAP diluted net earnings per share outlook to $1.36 to $1.40 to reflect the successful separation of its software business
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Frying Pan or Fire? The Continuing Story of HPE

With these results, HPE beat Wall Street expectations. As CEO Meg Whitman stated, “The results of the third quarter are an encouraging sign of the progress we are making. With better execution we drove overall revenue growth, exceeded our EPS targets and improved our operating margins sequentially, all while completing the spin-merge of our software business. There’s more work to do, but we are on the right track.” Bullish words. But was the market happy? On the face of it—it seems that the jury is still out, and the judge is awaiting the final verdict. HPE’s stock has still not recovered from the 21% beating it took on Friday, when HPE announced that the $8.8 billion spin-off of its legacy software business to Micro Focus had been completed. However, with these results, it seems that HPE has delivered on its promise from its second quarter report that the worst is over.

Solid growth in EMEA and APAC offset a modest decline in Americas revenue, and a 1% decline in global server revenue was offset by strong storage and a 30% quarter increase in revenue for the network division. The SimpliVity division saw a 200% quarter growth, but to be fair, this was from a small base.

On the same day as the quarter report, HPE announced its fifth acquisition of the year: Cloud Technology Partners, a consulting, design, and advisory services company that specializes in advising companies on how to move to the cloud and where to move when choosing an IaaS vendor. The acquisition will be folded into its Pointnext IT services organization, which provides consulting and implementation services for IT organizations—a body shop for other resellers. It may come as a bit of a surprise that HPE still has a consulting arm, seeing as it divested its technical services arm to CSC as part of another spin-merge deal. It may be a bigger surprise than HPE’s buying a consultancy company after that divestiture.

However, this purchase makes much more sense to me than the EDS purchase ever did. It builds upon skills HPE already has and adds new skills, whereas the EDS deal was done purely for the contracts it would bring in. There was no real game plan on integration into HPE technical services. As such, HP TS (as it was then) ended up becoming more like EDS, not the other way ’round. HP ended up losing a lot of managed service and project work due to its becoming the “son of EDS” rather than killing the toxic EDS culture and replacing it with what was, to be fair, a very healthy culture. When looked at with these eyes, the folding of Cloud Technology Partners into Pointnext makes sense: it seems to be a move to become the advisor to the advisors.

All in all, this set of results is something to crow about. However, HPE may have jumped out of the frying pan, but it is certainly not out of the fire yet. There will need to be at least two or three more quarters and a healthy year end to satisfy the hardened pundits of Wall Street. It would also help if Whitman could avoid becoming involved with high-profile moves like the one to Uber. Nothing spooks analysts more than a shaky and uncertain management structure.

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