Hardware – yes, hardware – is driving Hewlett Packard Enterprise's top line

But it came at a cost: Operating profits down by almost half

Hewlett Packard Enterprise spends much of its time talking about hybrid IT taking over the world, but it was good old fashioned hardware - boosted by a $3.5bn buy - that made Q1 of fiscal year 2016 better than it might have been.

In the period ended 31 January, the first full quarter of since HPE split with the PC and printing arm, revenue slipped three per cent year-on-year as reported to $12.7bn, but was up four per cent in constant currency (CC).

This was higher than analysts’ consensus estimates of $12.69bn.

The appreciation of the US dollar versus all other major currencies across the world is still hurting US-based companies with overseas operations. Save for some clever hedging, there’s not much they can do to counter this.

The Enterprise Group had the wind in its sails during the quarter, growing one per cent to $7.1bn, or up seven per cent when the forex rate impact was excluded.

Servers were down one per cent as reported but up five per cent in CC. CEO Meg Whitman said the company did not and will not “chase share for share’s sake” and sees demand from HPC to the IoT and Cloudine systems.

The biggest threat to HPE in this sector is contract manufacturers in the Far East who are selling direct to the world’s largest service providers. In turn, those are chowing down on built-to-order servers for their ever-expanding data centres.

Evidence emerged this week that some of those ODMs are building rival sales channels.

A similar picture was seen in HPE's storage business unit; sales fell three per cent as reported but grew by the same amount in CC. 3Par grew by triple digits, albeit in US dollars, and converged storage was up 17 per cent, HPE said.

But it was in networking, boosted by the $3.5bn buy of Aruba, that HPE saw the biggest expansion: up 54 per cent as reported, or up 62 per cent in CC. Excluding the acquisition, revenue grew in the low double digits – but HP didn’t specify the exact number.

Technology Services, the last business unit of the Enterprise Group, reported a sales decline of nine per cent, down three per cent in CC. HPE blamed customers delaying orders in China.

As for the Cloud unit, HPE didn’t open up on the size of the business in the quarter - it previously said it turned over about $3.3bn every three months. But Whitman said it won 200 Helion customers in the quarter including “some of the world’s largest banks, service providers and industrials”.

Enterprise Services - the vendor’s Achilles Heel in recent years - posted a six per cent drop in sales to $4.7bn. It “continues to execute well against its turnaround strategy,” said the CEO. Operating margin remains at 5.1 per cent but the long-term goal is rise to between seven to nine per cent.

Infrastructure technology outsourcing was down eight per cent, and Application and Business Services dipped three per cent.

Fewer customers are signing big ticket outsourcing deals, and HPE is cutting its cloth in the division - with a big proportion of the planned 30,000 job cuts coming from this area.

Three customers accounted for 65 per cent of operating profit at Enterprise Services in fiscal ’13 but no account makes up more than ten per cent now, said Whitman.

“We also continue to make progress on our cost structure by exiting high-cost data centres, improving low-cost location mix and rebalancing our workforce,” she said. So that’s server consolidation, offshoring and cutting jobs.

As for HPE Software - which the firm repeatedly, and rather boringly, refers to as the industry’s best kept secret - sales slipped ten per cent to $780m; licensing was down six per cent; support was down 13 per cent; professional services fell seven per cent; and SaaS shrank nine per cent.

Lastly and perhaps least, the banking side of the organisation, Financial Services, dipped three per cent to $776m, but grew three per cent in CC.

Looking down on the numbers from a comfy chair in the CEO's office, Whitman told analysts on a conference call that HP’s break-up is working - in much the same way she previously said remaining as one HP was the right thing to do.

“We are already seeing the benefits of being a smaller, more focused and agile [$53bn] company across a number of fronts. Our customers and partners understand our strategy and appreciate working with a simplified, faster moving organisation”.

Expenses were up slightly in the quarter to $12.34bn, due to restructuring, separation costs and acquisition related charges. This and smaller sales put a big dent in operating profits, down 47.5 per cent year-on-year to $384m. After interest payments and tax, net profit was $267m, versus $547m a year earlier.

HPE’s underlying sales seems to be in better shape, but like swallows and summer, it will take quite a few more quarters before the company can say with any certainty that the sun is shining on it. As for the bottom line, exiting another 30,000 heads will likely help… in the short term at least. ®

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