The final quarter of HPE’s financial year 2018 has just come to a close and the press announcements and analyst reports are...
HPE: News from the very top …
NonStop Insider - HPEDan
It’s that time of the year again. HPE’s quarterly results have been announced and being Q2, 2018, we get to see how HPE has been performing through the first half of the year. The spotlight is now being firmly directed on HPE CEO, Antonio Neri, and his perspective as a technologist on how HPE is now performing and where it is headed are being well received. There are still some financial analysts who consider HPE a legacy vendor and who are surprised to see how well HPE is doing, but for the most part, financial analysts are prepared to concede that HPE is affecting changes that will be beneficial for all stakeholders.
From the transcript of the HPE Earnings call of May 22, 2018, we can read of what Neri says on a number of topics important to the NonStop community, starting with:
“Let me begin by saying that I’m very pleased with our strong performance in Q2. We continue to execute well across all business segments while delivering on a number of strategic initiatives. Revenue of $7.5 billion was up 10% from the prior year period. We experienced solid revenue growth across each business segment with particular strength in Intelligent Edge, high performance compute, Storage, hyperconverged and Composable Infrastructure. From a macro perspective, the IT market remains robust. We saw growth in all regions, with particular strength in both EMEA and APJ.”
“… HPE Next is our company-wide initiative to re-architect HPE to deliver on our strategy and drive new wave of shareholder value. It is all about simplification, execution and innovation. Through this initiative, we are simplifying our operating model and the way we work … we have dramatically reduced SKUs and platforms across our volume and value segments, which simplifies our operation and makes us easier to work with … The changes we are making through HPE Next will not only improve our cost structure. It will also give us a significant long-term competitive advantage.”
“We saw very strong growth in high-performance compute, Composable Infrastructure and hyper converged offset by the continued decline in our customized commodity server sales to Tier 1 vendors, a business we are moving away from. Our focus continues to be on providing solutions that deliver high-value differentiation to our customers and drive profitable share for HPE. And we continue to prioritize investment in those higher-margin, higher-growth segments of the market.”
What we can take away from these opening remarks from Neri is simple – revenue grew and by my count, this includes revenue growth from Mission Critical Systems where NonStop has its home. More importantly, the reference to reduced SKUs is significant – how many of you know tha,t according to Neri:
“In terms of what has been done, so we already initiated the platform simplification, to your point, right? We said 26 platforms down to 7. And on the volume side, 27 down to 9. So we are well on our way. We are not completely done on that, but we are well on our way.”
I highlighted this point in a recent webinar I gave where I suggested the NonStop community should be very thankful that it has made the cut – it’s one of the 7 platforms where HPE continues to invest. This too was picked up by Market Realist in the commentary that it provided following the release of the Q2, 2018, financial results under the heading Hewlett Packard Enterprise’s Performance in Fiscal Q2 2018:
“HPE wants to streamline its business processes and modernize its IT systems through the initiative, which could lead to better execution and help deliver on the company’s strategy. HPE is now focusing on shifting investments in high-growth, high-margin areas.”
Again, not only consistent with what Neri was telling financial analysts but also echoing what Randy Meyer, VP & GM, Mission Critical Systems, told the GTUG audience in Leipzig only a week ago. It is also good to note too that NonStop and Mission Critical Systems are a key part of Hybrid IT which according to HPE, as reported by Market Realist in the same commentary as noted above, accounted for:
“ … 80% of the company’s revenue in its fiscal second quarter. The segment’s revenue was $6 billion, a 7% rise YoY (year-over-year). Its revenue growth was driven by solid performances across all its business verticals. HPE is now focusing on providing different solutions to customers, which could drive the company’s profitability.”
Finally, from Market Realist was the recognition that as of the halfway point in 2018, HPE has:
“… a strong portfolio of products and services with solid growth in value offerings and improvements in its core business volume. Overall, IT spending has increased this year with strong customer demand across businesses and regions.”
Simply put, this particular financial analyst believes that as a result of HPE Next initiative and the reduction in SKUs / Platforms, HPE has focused on value products for markets where businesses have the funds to spend on new technologies, products and solutions. This too is the same as what Forbes noted in its update – Key Takeaways From HPE’s Earnings And What To Expect Through Fiscal 2018:
“The company continues to focus on enterprise hardware and customer services in order to continue the growth spree in revenues in the coming quarters. We expect this trend to continue through the end of fiscal 2018 in October. We forecast Hybrid IT revenues to be over $24 billion for the year (revenues for the 6 months ended April stand at $12.3 billion). We further forecast HPE’s financial services revenues to be up 8-9% to $3.8 billion for the year. The company has enhanced its focus on core servers, as well as high-margin networking product lines, which have higher average prices and margins relative to the custom commoditized Tier-1 products.”
Getting the picture? In closing, it was left to a late-breaking update from Seeking Alpha, a paper closely tied to the CNBC news network, following a lot of volatility in the stock price after Neri happened to mention on the earnings call with investors to expect a “more challenging second half” with growth rates moderating given more difficult year-over-year comparisons. “To be fair, that’s not exactly indicative of deeper problems with HPE’s underlying business,” said the Motley Fool. “But with HPE stock up nearly 30% from its 52-week lows set last June, it shouldn’t be terribly surprising to see the stock pulling back given these words of caution.”
As for that commentary from Seeking Alpha, it was much more upbeat:
The driving point here: against the backdrop of a strong IT industry forecast, the fact that HP Enterprise is able to drive 10% growth – above industry estimates, even without a software arm – is impressive.
Whenever a strong quarter such as this one is met with a turbulent response from the markets, investors should consider the fundamentals of the quarter and examine if shares are worth buying. In HP Enterprise’s case, we found no major red flags with the results – margins are up across the board, driven by component pricing decreases, a flattening of corporate expenses, and foreign exchange and tax tailwinds. In addition, the company has managed to drive double-digit revenue growth despite not having a meaningful presence in the higher-growing software segment.
All in – a pretty solid report card at a time when markets remain volatile and the final comment here is that the day after the calls to analysts were made, followed by a drop in the stock price, the market has rebounded and HPE stock is up once again.
Recently I needed to take a closer look at the time when HPE CEO, Antonio Neri, came to head HPE. In so doing, I came across a report featuring some of the last remarks made by former HPE CEO, Meg Whitman. These comments can be found in the government pages of the publication, diginomica – “a new type of media property designed to serve the interests of enterprise leaders in the digital era” published November 24, 2017. Under the heading, HPE’s next phase – life after Megthere are a couple of quotes by Whitman that are worth taking a look at –
“There hasn’t been a change in sentiment. What I think is absolutely true is Antonio is ready to take the reins and go the distance. I you think about it, we have a much smaller, much nimbler, much more focused company. I think it is absolutely the right time for Antonio and a new generation of leaders to take the reins. We have got a very good leadership bench. We have got a strategy that is crystal clear and focused.
“I think I have added a lot of value here in terms of shareholder value creation, financial restructuring, nice ignition of the innovation engine, but the next CEO of this company needs to be a deeper technologist and that’s exactly what Antonio is.
“This transition is possible because of all the work we have done during the past 6 years to transform HP. We stabilized and strengthened the leadership team, improved productivity and reinvigorated the culture. We significantly improved customer satisfaction driving NPS scores from negative in some cases to an industry leading 80 for our services today. And we pivoted hard back towards partners, rebuilding our entire partner ecosystem and shifting resources to this critical go-to-market channel.”
The emphasis in these quotes are entirely mine and I have made them to highlight what I consider as important for everyone in the NonStop community to consider now that we are almost six months removed from that time. I suspect I will not hear any arguments being made about HPE not being focused or lacking in a crystal clear strategy – if the words simplifying the transformation to hybrid IT don’t ring any bells, then you certainly have been out of the loop.
However, igniting the innovation engine, strengthening the leadership team (as well as reinvigorating the culture), and making that all-important pivot back to partners well, they may not be as well known to the NonStop community. But indeed, that’s what HPE has done in these six months. The most obvious outcome from strengthening the leadership may in fact be the changes that happened in sales – from three GEOs to eleven regions with just a single head of sales (formerly from AP-J), a separation of value sales from volume sales with completely different sets of operating guidelines and performance metrics, and yes, a clean line-of sight for all HPE customers as to who they should be talking to. Again, all in six months …
“So now HPE is more relevant, they know what we stand for and the core value proposition is the software defined data center on-prem with public cloud-like economics.This whole move to flexible capacity and a pay-per-use modelis actually encouraging people to say, ‘Do I need to move every workload to the public cloud?’”
The above quote was among the last comments Whitman made in her exchange with diginomica and they are very revealing. While we are all getting more comfortable with software defined everything and see in the move by NonStop development to provide virtualized NonStop, it is the observation by Whitman and supported by Neri, about the transition to “cloud-like economics” with a “pay-per-use” model. This is all very new to the NonStop community and will be the topic of many conversations at upcoming RUG events as it is both an opportunity (for differentiation with greater competitiveness) and a challenge (over implementation) not to mention a likely trying financial period for the NonStop vendor community during the transition.
As a community, we all like to hear messages directly from those in leadership and our attendance at major RUG events like BITUG, GTUG and in particular, the NonStop Boot Camp, is very much driven by our understanding that these are the places where we can hear what’s happening with NonStop and where we can converse directly with all responsible parties. For 2018, these conversations will be particularly lively, I expect, but at the same time, healthy for all involved. If the strategy is clear and the execution proceeds under the oversight of a strong leadership team, and yes, if the journey is taking all of us to a software-defined data center exhibiting cloud-like economics, then surely this will be beneficial to the NonStop community.
For far too long ago the biggest knock against NonStop has been cost both initial cost and total cost of ownership – but that will all likely change as HPE retools the pricing models. It was late last year that newly-minted boss of HPE Pointnext, Ana Pinczuk, joined by Rackspace EVP of Private Cloud Scott Crenshaw (following the announcement of the new pay-as-you-go managed private cloud, offered in partnership with Rackspace) told digital publication SDxCentralon December 15, 2017, that “enterprise customers want managed services and pay-as-you-go pricing.” The only real question remaining today for the NonStop community then is whether or not we are ready for the change and are we prepared to welcome the benefits that will likely follow?