I joined CNBC this evening to chat about Hewlitt Packard Enterprise’s (HPE) latest earnings announcement.
Hewlitt Packard Enterprise investors got some much-needed good news today, as the company beat third quarter estimates. Shares are up over 4% after hours. Earnings came in at 31 cents per share, better than the 26 cents expected by analysts. Revenue also beat by a wide margin, $8.2 billion vs. an expected $7.5 billion.
Importantly, “future HPE,” or HPE minus its software group, saw sales rise 6%. Sales growth has been hard to come by in recent quarters, so this was welcome.
But let’s not get too carried away here; “less bad than expected” would be more accurate than “better than expected.” Margins continue to sag (operating margins declined from 9.9% to 8.4%) and the outlook for the remainder of the year wasn’t exceptionally rosy. This is a case of a company beating bad expectations.
HPE is in a tough spot here. The traditional server market is no longer growing. 2nd quarter industry-wide numbers aren’t available yet, but shipments were down 4.2% in the first quarter (according to Gartner) after being down big in the fourth quarter as well. Some of this is due to difficult comps, but let’s not miss the elephant in the room: Amazon’s AWS.
With virtually all growth going to Amazon and Microsoft’s respective cloud services, Hewlett Packard Enterprises is left to duke it out with Dell and IBM to grow market share in a no-growth market. That’s a terrible place to be.
So, the simple answer is that HPE needs to compete in the cloud. But that is now far easier said than done with Amazon, and to a lesser extent Microsoft, having the first mover advantage. Jeff Bezos has repeatedly said, “Your margin is my opportunity.” To say he is a worthy adversary is an understatement.
So, if computing is moving away from traditional enterprise computing setups and into the cloud, couldn’t HPE focus on selling directly to Amazon or Microsoft?
No. Both companies tend to build their own hardware using commoditized parts. There is no reason for them to pay up for a brand name like Hewlett Packard.
HPE is really pushing its “hybrid” model, which allows enterprise users to move data needs between local servers and the cloud. It’s an interesting concept, and I expect they’ll get some amount of traction from it. But this is something that very large enterprises are already doing for themselves, so their market here is small and midsized companies who might prefer the simpler solution of going all-cloud. I would be cautiously optimistic here, but this is far from a slam dunk.
HPE has a rough road in front of it and, barring major change, likely faces a slow road to irrelevance.