HPE investors wondering if they bet on the wrong horse in split
The latest results from Hewlett Packard Enterprise Co. may have some investors wondering if they bet on the wrong horse after HP’s massive split 18 months ago.
HPE HPE, -0.21% shares fell nearly 3% in after-hours trading Wednesday, after the corporate computer server and storage business reported disappointing fiscal second-quarter results, in part due to higher memory costs and the ongoing impact of the loss of one big server customer. HPE also just completed a spin-out of its software and services business.
In contrast, HP Inc. HPQ, -0.95% reported better-than-expected results last week as revenue grew in both its PC and printer business for the first time since 2010. At the time of Hewlett-Packard Co.’s big split in November 2015, many investors, nervous about the big write-downs planned by the PC and printer business at the time, followed Chief Executive Meg Whitman to HPE, the company that seemed to be growing faster.
But in recent quarters, HPE revenue has actually been shrinking. In the just-reported quarter, revenue was down 13% year-over-year, in part due to a drop in demand from a unidentified major tier-1 customer, an excuse Whitman also used last quarter. That customer is likely Microsoft Corp’s MSFT, -0.81% cloud business, Azure, according to Patrick Moorhead, principal analyst with Moor Insights & Strategy.
HPE executives told analysts on a conference call that they will again cut costs, this time by between $200 million to $300 million in the next two quarters, to help offset the hits to its gross margins in the quarter. HPE Chief Financial Officer Tim Stonesifer said that 50% of those costs will come through corporate policy changes like cutting travel, and the other half will come from labor, in a call full of euphemisms ranging from “stranded costs,” “cost actions” to “cost outs.”
One analyst said some customers have expressed concern that HPE has pruned too much of its business in the whirlwind of splits and spins. Whitman said that the feedback she has gotten from customers is that they are amazed at how smoothly the [latest] transaction has gone.
“I am now laser-like focused on what is the future of Hewlett Packard Enterprise’s financial architecture, how do we simplify, how do we re-engineer the processes and how do we take out overhead given that we are now a $28 billion company, down from $110 billion just five years ago,” Whitman said.
Whitman has been CEO of the new entity for almost two years, and before that, CEO of the larger HP since 2011. Why should investors trust that now, after all this time, two big spin-outs later and after seemingly endless restructurings, she will have the correct view on HPE’s future?
Granted, HPE recently has made much better acquisitions than in the past, in growth areas such as flash-storage company Nimble Storage and hypercovergence player Simplivity, but they are still not boosting its revenue growth. Moorhead said he believes that by fiscal 2018, HPE’s balance sheet will be cleaned up, after all the major changes it has gone through this year. But some investors might not want to wait that long for HPE to improve its earnings, especially if cost-cutting is the only way there.
This is the exact opposite of the way this corporate divorce was expected to go: HP was supposed to be the company frantically cutting costs to survive in a world that was not as interested in its PCs and printers, while HPE found growth in the hefty business for enterprise technology. Investors who believed that line have many reasons to be angry.