HP's final single financial report adds up to double trouble

Stuart Lauchlan Profile picture for user slauchlan November 24, 2015
Summary:
One last set of combined financials for old time's sake before the two HPs reporting their own numbers next year - and we're going out with a whimper.

Meg Whitman 2
Meg Whitman

From the first quarter of next year, what used to be Hewlett Packard will report two sets of numbers, one for Hewlett Packard Enterprise (HPE) and one for HP Inc.

But yesterday it was a case of everyone mucking in for old time’s sake as the two new entities joined forces to disappoint Wall Street with a fifth straight quarter of revenue decline.

For its final quarter as a combined company, HP turned in flat net income of $1.3 billion on revenues down 9% year-on-year to $25.7 billion, missing analyst consensus expectations of $26.4 billion. For the full year, the combined company’s revenue was down 7% to $103.4 billion.

What was interesting was the seeming reversal of fortune that occurred after the results were announced. Since the split earlier this month, HPE’s share price has fallen, while HP Inc’s has risen. Yesterday, both arms headed in the opposite direction.

HP Inc, focusing on printers and PCs, turned in a 14% decline in sales of PCs, with sales to corporates down 15% and to consumers by 12%. Overall print revenue was down 14% on the back of a 17% decline in overall printer sales. Again sales to corporates were particularly badly hit, down 17% year-on-year, while sales to consumers were down 14%. To top things off, revenue from ink and paper was down 10%.

Over at HPE, where it’s all about servers, storage, networking and services, it was a different story. Server sales were up 5% year-on-year, while networking revenue shot up a hefty 35%. Only the services business disappointed with a 9% revenue decline, driven by an 11% fall in outsourcing business.

For her part, Meg Whitman, President and CEO at HPE, argues that despite the share price drop, HPE is off to “a very strong start”, claiming:

Customers tell us our focus is spot on.

Whitman points to the company’s evolving cloud strategy as a case in point:

We are the leading cloud infrastructure provider and we see a significant opportunity as enterprises move to a hybrid cloud environment. In late October, we announced HP Helion OpenStack 2.0, our latest enterprise grade cloud platform with new lifecycle management and security enhancements.

We believe strongly in open standards and our OpenStack-base cloud offerings provide the open, agile and secure hybrid cloud environment our customers are asking for. We also refined our cloud strategy during the quarter. Our goal is to help customers source, manage and consume services across traditional, private, public and manage cloud environments.

As for the decision to “sunset” its public cloud offerings, HPE will next week go into more detail at its Discover conference about a closer relationship with Microsoft for public cloud. Whitman explains:

We announced in October that we will double down on our private and managed cloud capabilities and sunset our public cloud offering. This is the right move. It plays to our strength in private and managed cloud. We will continue to extend our cloud infrastructure leadership and integrate the public cloud element for our customers through a strategic partner-based model.

Microsoft shares our view of a hybrid IT approach for enterprises and we both see opportunity to simplify hybrid infrastructure for our customers. Going forward, Microsoft Azure will become a preferred public cloud partner. HPE will serve as a preferred provider of Microsoft infrastructure and services for its hybrid cloud offerings.

Wider market

Whitman reckons that the behavior of rivals in HPE’s space is helping prospects:

We've been very successful actually at taking server share as the IBM server business migrated over to Lenovo. We've actually been very good at taking share and also gaining formally our former IBM channel partners, so we’ve been very aggressive there.

The Dell-EMC merger creates uncertainty in the marketplace, she adds, and increases differentiation between suppliers:

I mean they could not be in more stark contrast. They’re getting bigger leveraging up and doubling down mostly on legacy technology, while our strategy is to get smaller. I’ve spent the last four years deleveraging the balance sheet and leaning into new technology like converged infrastructure, new server architectures, 3PAR with all-flash, Aruba, et cetera.

Whitman boasts that HPE’s “innovation engine is humming”. Away from the rhetoric, that means in large part drilling down on four transformation areas:

These four transformation areas are exactly what virtually every customer’s looking for. How do I transform my IT environment to a hybrid environment? How do I secure my digital enterprise? How do I enable a Big Data analytics environment? And how do I drive workplace productivity? We are aligning software, service and hardware or infrastructure to that.

But it is a case of having to operate in a different way. Whitman points to the enterprise services business as a case in point, particularly around IT outsourcing, which used to be about long contracts of up to 8 years, where money was made in the final four years. Today, it’s all about shorter term contracts and what Whitman pitches as a “more strategic relationship” with the customer:

As opposed to just labor arbitrage, now there is how we transform your infrastructure to be more nimble, more agile and lower cost.

Now we are saying, we will help transform your IT environment to be part of this new world order that can allowed to be lower costs, more modern and allow you to be more agile.

Those contracts are tend to be shorter and we’re actually okay with that because we also are very clear now that we’re not going to lose money in contracts in years one and two and these things have to be profitable from the beginning.

My take

Well, if nothing else, this last quarter has a single company has laid out the challenges that the two individual businesses face moving forward.

Whitman is playing the ‘worst is behind us’ card, loudly and consistently. She may be right, but 2016 is shaping up to be one of the most important - and most scrutinised - years in HP’s long, long history. The future starts here.

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