HPE in 2018

Richard asks an interesting question and I prognosticate:

When Richard sent out his email requesting submissions for the March 2018 issue of the “NonStop Insider”, he posed a question that got me thinking. He asked:

“We have just come off a good financial quarter by HPE – will this continue? Is it a one-off? And what does a strong HPE mean for NonStop?”

Hmmm, with so much economic news, at least here in the United States, it’s worth a moment’s thought.

How good was HPE’s Q1? 

Bloomberg.com reported on February 22 that HPE’s revenue was $7.67 billion in the three months ended Jan. 31, an 11% gain year over year, and $610 million more than analysists projected. Profit, excluding some items, was 34 cents a share, versus the analysists estimated 22 cents a share. A good quarter, yes we’ll agree.

In addition, the expected profit in Q2, excluding some items, will be between 29 and 33 cents per share, again beating the analyst’s average estimate of 26 cents per share. So, from a revenue and profitability standpoint, the first half of fiscal 2018 looks pretty good. HPE cautions however, that these results were aided by circumstances that may not persist for the entire fiscal year, such as a larger than usual backlog of hardware sales in Q1, growth from the Nimble Storage acquisition and higher prices due to increased memory costs.

But what about the Tax Cuts?

The changes in the Tax Cuts and Jobs Act of 2017 will reduce HPE’s tax rate in fiscal 2018 from 20-22% to 11 to 15%. This reduction is of course across the board, and will positively impact the bottom line of most all US companies. But what can be expected as corporations receive the benefits of these rate reductions? Stephen Gandel, on Bloomberg.com, looked at 51 S&P 500 companies (obviously 10% of the index) and he found that in the aggregate, these 51 companies would receive a tax savings of $54.5 billion in the first year (2018). Of that, they planned to spend $12.3 billion, or 22.6%, on Business Investments, such as Capital Expenditures and R&D. This bodes well for companies like HPE. In fact Crawford Del Prete, the chief research officer for IDC stated “Market demand has improved as customers look to upgrade infrastructure in a better business environment. HPE’s products are stronger, and they are better organized to capture demand with less layers of overhead.”

Repatriation- the “wild card”?

Along with the reduction in the corporate tax rate, the Tax Cuts and Jobs Act of 2017 requires companies to pay a reduced tax rate on profits they’ve generated and left overseas in the last 30 years. This tax must be paid, whether or not the company chooses to repatriate the funds, and once paid these funds will not be subjected to any additional taxation. The new tax rates will vary between 8 and 15.5%, depending on whether the overseas profits are liquid or illiquid.

Under the previous tax code, companies would have to pay a 35% tax, but only when the funds were brought back into the United States. As a result of the previous tax rate, Moody’s estimates that U.S. companies are holding in the neighborhood of $1.4 trillion in cash offshore. The CBO has estimated that this one-time change will bring in $339 billion in the next ten years. Logic would dictate that a sizeable chunk of this will, like the Tax Cut, be spent on Capital Investment and R&D. All good news for the long term growth and viability of HPE.

And then there’s the Consumer Confidence Index!

The latest Confidence Board Consumer Confidence Index, based on data collected through February 15^th, showed Consumer Confidence at the highest level since November of 2000. Here is an excerpt from their February 27^th press release:

“Consumer confidence improved to its highest level since 2000 (Nov. 2000, 132.6) after a modest increase in January,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions was more favorable this month, with the labor force the main driver. Despite the recent stock market volatility, consumers expressed greater optimism about short-term prospects for business and labor market conditions, as well as their financial prospects. Overall, consumers remain quite confident that the economy will continue expanding at a strong pace in the months ahead.”

While Tax Cuts and Repatriation of Overseas Profits are harbingers of a good economic future, consumers are the engine that drives the economy, if they’re buying, HPE will do well.

What about NonStop?

In my opinion, NonStop is well positioned to take advantage of increased IT infrastructure spending. The respect for the NonStop platform within HPE is obvious; two years ago NonStop X and the L-Series software was introduced, a year ago the Virtual NonStop, and last year the Virtual-Converged NonStop. And, all the while NonStop continues to maintain and update the J-Series software as well. The Virtual-Converged system necessarily bridges the gap between the NonStop X fully converged servers and the purely virtual NonStop (hardware agnostic) product. They have the right products at the right time, and a well-developed, long-standing and loyal group of customers and 3^rd party suppliers, like Tributary Systems. I’m a firm believer in the old adage “a rising tide floats all the boats”, and from what I see economically, the tide is definitely on the rise.

Tributary Systems’ is ready to support hybrid IT with NonStop, IBM and open platforms. Our new, low cost, highly secure massively scalable data backup, archival, and DR solution for Cloud-based backups is ready now (https://tributary.com/wp-content/uploads/2018/02/SD-brochure-2-1-18.pdf ). Employing IBM’s Cloud Object Storage with Erasure Coding in partnership with Tributary’s proven Storage Director, this solution eliminates the need for NonStop “silos” while solving all the critical issues associated with public clouds – transparency, security and escalating costs with “puts” and “gets”.

That’s our take this month, and with a reinvigorated economy, this is bound to be a pivotal and profitable year for our preferred platform. One thing is sure, change is inevitable, but NonStop and long-time partner Tributary Systems will be part of it………..