December 28, 2016
HPE losing weight for 2017: in servers, too?
Hewlett-Packard Enterprise made itself smaller during 2016, the natural progression of a slim-down that started in the fiscal 2016 period for the company. Annual results for the first full year of the dual-HP venture—one devoted to business computing, the other to all else—showed a continued decline in sales. HP cut its software group loose this quarter, selling off assets like Autonomy to Micro Focus. Becoming smaller has not helped HPE's overall numbers quite yet.
Sales at the Enterprise group, home to 3000 replacements like ProLiant servers, fell by 9 percent from 2015's Q4. The full HPE sales tally for the quarter dropped by $900 million in year-over-year measures. Were it not for favorable currency shifts, the company would have had to bear the full range of these losses. Until HP could offset its results with divestitures and currency benefits, the Enterprise Group ran $403 million in the red. A total of $50.1 billion in HPE sales was booked in 2016. More than $3 billion in profits were left after expenses were met and taxes were paid.
A report from Patrick Moorhead at Forbes noted that the sell-off of HPE software to Micro Focus was a marriage to a company with a solid history of preserving acquired products. Whitman "bragged on Micro Focus a bit," Moorhead wrote, "saying that the company has never shut down a product that they acquired and merged with, and that their growing assets will be important moving forward." He added that the statement looked like it was crafted to keep the former HPE software customers satisfied with becoming Micro Focus clients.
HPE keeps slimming itself down to ensure its expenses will drop. Since revenues are on a decline year over year, the ploy to sell off businesses with dim short-term prospects seems destined to continue. On the website The Street a story has reported that according to Credit Suisse analyst Kulbinder Garcha, Hewlett Packard Enterprise could part with its servers, storage, IT support and consulting. One potential buyer might be the Chinese multinational networking and telecommunications equipment and services company Huawei.
Bedrock platform software is moving outside HP, too. There's already a timetable for turning over the OpenVMS software operations. HP 3000 owners remember the days when HP sold application software that could compete because its installed base propped up mainframe server support contracts. Things have peeled apart by today. Support contracts are the shadow profitability tied to OS operations.
Hewlett Packard Enterprise's server business, which Garcha values at $8.9 billion, could interest Huawei. The unit has $15.4 billion in projected fiscal year 2017 sales and $1 billion in Ebitda, Credit Suisse estimates.
Even after paying MicroFocus and losing billions in software support dollars, Hewlett-Packard Enterprise believe it will still save money. Company strategists have looked at this gambit and concluded the savings are genuine. The software business at HPE doesn't include operating systems like OpenVMS; those are groomed and improved in the Enterprise group. sorry for the loss of jobs at HP, and more sorry that customer service levels might decline. Or not; we don't know yet.
HP wanted to be ranked No. 1 in selling everything. It turns out being ranked No. 1 in profits matters most. If that wasn't true, there wouldn't be an HPE today -- just an HP. CEO Meg Whitman said the company's on target for what it wants to become. Divesting software and services in 2016 led Whitman to sum up the year. "The HPE that emerges after the two spin mergers will have a clear vision, the right assets, and direct line of sight to significant market opportunities," she said.
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