HPE, HP Inc - first year done, what's the progress?

Profile picture for user slauchlan By Stuart Lauchlan November 22, 2016
Summary:
HPE and HP Inc have completed their first full fiscal years as independent companies. The story to date - a mixed bag, but clear signs of progress, with challenges ahead.

hp
Whitman and Weisler

The companies formerly known as Hewlett Packard have posted their first full year financial results and it’s fair to say that it’s a case of mixed fortunes for both HP Enterprise (HPE) and HP Inc.

For HPE’s full year ending 31 October, net profits were up 24% year-on-year to $3.2 billion on revenues down 4% to $50.1 billion. For its part, HP Inc saw GAAP net profit fall 28% to $2.7 billion on revenues down 6% to $48.2 billion.

But it was the fourth quarter that brought the real pain to both firms with HPE profits plummeting 78% year-on-year to $302 million on revenues down 9% to $12.5 billion, while HP Inc’s revenues rose 2% to the same level of $12.5 billion, but GAAP net profit fell by two-thirds to $500 million.

For HPE CEO Meg Whitman, the important message to get across is that (a) it’s been a busy year with a lot of change going on and (b) the firm is travelling along the right track:

While there is always more work to do, our go-to-market motion is strong and our increase confidence is really paying off. We saw growth this year in key areas of the portfolio, including high performance compute, Cloudline servers, all-flash storage, converged systems, mission critical systems, and networking with Aruba. Technology Services returned to growth in the last two quarters of the year and we expect that momentum to continue into FY 2017.

Strategic Enterprise Services revenue grew over 30%, driven by Helion Managed Cloud, which grew over 50% and Virtual Private Cloud, which grew over 100%. And in software, we saw solid SaaS and security growth, with particular strength in Vertica and voltage solutions.

The two main transformative events in HPE’s first year were the ‘spin-mergers’ of  its Enterprise Services (ES) business with CSC and its software business with Micro Focus. The completion of these will have a significant impact on Year 2 of HPE, says Whitman:

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. Our goal is to be the industry’s leading provider of hybrid IT built on the secured next generation software defined infrastructure that runs our customer’s data centers today, bridges them to multi cloud environments tomorrow, and powers the emerging intelligent edge that will run campus, branch and industrial IoT  (Internet of Things) applications for decades to come, all delivered through a world-class services capability.

There has also been what Whitman dubs “one of those great unintended consequences” from the spin-merger of the services business:

Former ES competitors like Accenture, PwC, the Indian outsourcers, they no longer view us as a competitor, and we are being integrated into a lot of their offerings that we were never integrated in before. It’s been fascinating to me how much more traction, I think, we’re going to get with those alliance partners.

In this mix, Whitman talks about the need to “power the emerging intelligent edge”. By this she means:

As data volumes increase in business environments outside of the data center, like factories and retail stores, customers need a new set of tools to gather, process, and analyze the critical information that will allow them to make decisions in real time. This means that they need compute storage and connectivity at the edge, integrated into their operational environments, and seamlessly connected to their hybrid IT environments. Through our Aruba offerings in security, analytics and connectivity, and our edge line converged IoT systems, we’re building an ecosystem of partners and bringing unique solutions to this fast-growing market. I like to say, we are going to be the IT in IoT.

These areas of focus are beginning to pay off, she argues:

In hybrid IT, we recently replaced a 19-year EMC relationship with a major global healthcare company, where we will provide services and technology to deliver simplicity, operating efficiencies, and automation as the company modernizes and realigns their core storage and compute platforms.

In the intelligent edge market, Nordstrom recently named Aruba as their preferred provider for their Wi-Fi services strategy in all their stores, distribution centers, and corporate sites. And we announced a significant new wireless network roll out at Penske Truck Leasing to enable greater workforce productivity and connectivity at its truck facilities.

PC plus

While Whitman’s overall message is that HPE will move into its second year with most of the cost implications of its strategic decisions underway, HP Inc is still looking at significant cost-cutting for the next three years, with 4000 further headcount reductions.

As such HP Inc Dion Weisler comes across as more on the back foot than Whitman as he looks back at the first twelve months in business:

This time last year we faced industry-wide headwinds and difficult market conditions but…we believe change equals opportunity and that we would reinvent ourselves and our business to drive long-term success. We accelerated restructuring activities and adjusted our tactics to deliver on our commitments with operational discipline.

While the road ahead will continue to be challenged, we exited fiscal '16 with momentum and confidence in our ability to execute.

He adds:

Our core markets are still in flux and we believe the change will only accelerate. The macroeconomic and financial market conditions are uncertain, the US dollar has been strengthening and this trend creates precious US-based multinational companies like HP with over 60% of revenue outside of the US. We know how to operate in up and down markets and we are prepared to tackle the challenges that lie ahead and make the right decisions for the company for the long-term.

Breaking down HP Inc’s results, PCs are a sweet spot.  Revenue for personal systems, which includes the computer lines, increased 4.2% year-on-year in Q4 to $8.02 billion Commercial sales rose 3%, while the consumer business climbed 7%.  Weisler says: 

I would say that the PC market is operating as we expected it to. I still think there is uncertainty in the market, the market as a whole hasn’t returned to growth. At the beginning of the year, we expected the declines would moderate through the course of 2016 and they did and we were able to adjust to that market, I think, much more quickly than many of our competitors. As a benefit of being a separated company, the speed, flexibility, focus of the organization was able to react to these market conditions and as a result of that, we’ve performed significantly better than the market and taken a solid premium to the market.

I think, longer-term, the business will continue to evolve and develop as a very large continuum of devices, everything from a smartphone up to workstations, some of that market we participate in the lines are blurring between the different categories.  The market is changing. We’re ahead of that curve. We’re skating towards where we believe the puck is going and investing in the heat of the market that we find particularly attractive.

My take

A mixed bag, but both firms have emerged from their first full year of independence intact. For HPE, it will be interesting to see how certain macro-factors impact next year. ‘Old HP’ was a primary supplier to the UK public sector, so watching for Brexit implications will be important, while Whitman herself was one of the most vociferous critics of Donald Trump’s candidature for US President.

HP Inc also finds itself facing some uncertainty around the impact of a Trump Presidency. Operating in 170 countries around the world, the firm’s CFO Cathie Lesjak says it’s too early to come to any conclusions about what changes to international tariffs or tax arrangements might mean for HP Inc.

That said, HP Inc’s claims of being ‘ahead of the curve’ in the PC sector, particularly the premium end of the market, seem valid. How long that will last remains to be seen, of course, but the PC sales mix is in a good place to enter the second year of life.