A tale of two HPs – HP Enterprise progress report

SUMMARY:

It’s 18 months since HP spit in two. In the first of two reports, a progress report on the HP Enterprise company finds restructuring and transformation work still to do.

Meg Whitman

It’s 18 months since Hewlett-Packard brought over 70 years of one of the most successful computer industry brands to an end and split in two – HP Enterprise and HP Inc. So what’s the progress report to date?

First up, HPE, whose CEO Meg Whitman boldly talks in terms of moving on to the next stage of what she calls one of the biggest corporate transformations ever seen:

We have just gone through one of the largest transformations maybe in American business history, we have created four industry leading companies that I think are poised to do very well in their given segments.

We separated from HPI in November of 2015 and last month, we spun our enterprise services business and merged it with CSC to form DXC Technology. Completing this transaction was a major milestone in our strategy and I’m proud that we were able to execute such a significant change within the tight schedule we laid out and on budget.

Later this summer, we’ll complete the spin merger of our software business. The two spin merger transactions will deliver more than $20 billion in value based on the current stock prices of the DXC and Micro Focus.

Maybe so, but behind Whitman’s upbeat words are some alarming numbers. A $500 million loss in its most recent quarter on revenue from continuous operations that was down 13% year-on-year to $7.4 billion. Total net revenues of $9.9 billion just missed the $10.1 billion Wall Street was expecting.

Revenue from the enterprise group fell 13% year-on-year to $6.2 billion, while software revenue was down 11% to $685 million. The one bright spot was financial services revenue, up 11% to $872 million.

What all that leads to is the inevitable exercise in cost-reduction and consolidation and Whitman is facing that head-on:

Now that we’ve completed the ES spin merger, we’re taking a fresh look at the cost structure for the new HPE. As a smaller company, it should be much easier to spot opportunities to optimize the business, streamline processes and reduce costs. We believe we can take out another $200 million to $300 million in cost in just the second half of this year.

There are big decisions to be made as part of this ongoing process of transformation, says Whitman:

We now need to look at the cost structure and say what is the process reengineering we need to do? What are some of the policy decisions we need to make upstream to be a much more efficient, leaner company that we can really see the productivity benefits and simplification. There’s lots we can do here.

We are now in a different stage. I can see this very clearly now that ES is gone, software is on its way and of course HPI has been on its own for 18 months. So, we’re at that next stage that I think we can have a major impact in how we run this company more efficiently and leanly. So we’re super excited about it. It’s going to be a lot of work because whenever you restructure a company, it’s a lot of work, but I can see it very clearly.

Pillars

What will result, she says, is a “nimbler, faster-moving company” that can focus on three strategic pillars, the first of which is the adoption of hybrid IT infrastuctures:

We are seeing strong demand from companies like global chemical company BASF, which recently selected HPE to build one of the world’s largest supercomputers based on HPE’s Apollo Systems.

We also announced an extended partnership with Nvidia to create a portfolio of solutions and services, purpose built for artificial intelligence and deep learning and we continue to be the leading SAP HANA infrastructure and services provider with two times the market share of our next closest rival. Our continued investment in HANA solutions, coupled with our 28-year alliance with SAP, is helping us break into new accounts and drive incremental revenue.

The second pillar is “to power the intelligent edge that will run campus branch and industrial IoT applications”, says Whitman. This pillar rests on a foundation of HPE’s Aruba techology offerings, which are lucrative revenue generators:

These Aruba installations pull through high-margin services, often up to twice the value of the hardware and software.
The third pillar is the provision of what Whitman calls “world-class expertise and flexible consumption models to help customers transform their IT environment” by 25,000 specialists in teams around the world:

These teams collaborate with businesses worldwide to speed their adoption of emerging technologies, including cloud computing and hybrid IT, Big Data and analytics, the intelligent edge and Internet of Things. We’re also seeing strong demand for our datacenter care as customers look to consolidate their datacenter footprints and flexible capacity, which delivers cloudlike consumption models with on premises solutions.

However clear the strategy is to Whitman and her team, there has to be a danger that all this change is going to ‘scare the horses’ in the customer base. Inevitably this is a suggestion that Whitman does not entertain:

The feedback from customers that I’m getting is actually they are amazed at how smoothly the separation of these companies has gone, whether it was HPI or CSC. I think if customers are saying have we shrunk back too far, we still need to educate them about the services capability that we still have at HPE. It’s not only our Technology Services (TS) business, our services and support business, it’s our TS consulting business, it’s Aruba Services and that’s very important, that advice and transform capability. I think we need to do a better job of, if you will, advertising that.

But customers who know us well, I think are super excited about the focus. They know the services capability that we have. They really resonated to the strategy. This strategy of we make hybrid IT simple, we power the intelligent edge and we have the services to make it happen totally resonate and so we’re excited about that.

She concludes:

So, I have no doubt about the strategy. I have no doubt about the validity of the spins. We are going to end up as a much stronger set of companies than we would have before.

My take

Whitman talks a lot about spins and certainly there’s a lot of spinning going on here, albeit not in the sense she means! No-one can doubt the ambition in play here, a corporate reinvention on a massive scale that was never going to be entirely without bumps in the road. But for a company that talks a lot about simplification, there’s a lot of complexity in the HPE proposition. There are major headwinds in the wider storage and server market that need to be ridden out, but equally there are growth sweet spots that can be exploited, such as the very healthy-looking wireless services space. This is a long game that’s being played.

In the second of two articles tomorrow, HPI’s progress is tracked. 

 

Image credit - HPE