The venerable tenacity of the HPE systems supplier

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Businesses large and small that depend on Hewlett Packard Enterprise to build their systems and certify them for an absolutely huge amount of software and support them for a long life in the field should send thank you notes to the venerable system maker. Every business HPE operates in is tough, and while it’s hard enough to generate income in a large-scale world, earning a few dollars to save for a rainy day is even harder.

And every year, quarter after quarter, through so many reorganizations and turnarounds it’s hard to keep track of, HPE stays in the game, fine-tuning, meter by meter. You can’t help but respect that. It is the triumph of the perspective of the future over the experience of the past. It also portends where all of the IT vendors, perhaps top-tier now, will need to go. Every surviving IT company has to fight to stay relevant after it becomes venerable.

And to be fair, according to HPE chief executive Antonio Neri, the company has made steady progress in doubling its core business on the systems it has decided to focus on. But it’s never easy, is it?

In the quarter ended July, HPE’s revenue increased 1.2% to just under $ 6.9 billion, and its net profit was $ 392 million, or 5 % of revenue, up almost infinitely from the meager $ 9 million in profit posted by the company. in the period of one year ago.

Sales of ProLiant servers, which are placed in the Compute group these days, along with the little data center networking HPE does, fell 8.4% to $ 3.1 billion over the course of of the period, which is a bit surprising until we consider the constraints of the supply chain. on the parts and manufacturing that all OEM and ODM deal with in the IT industry. Sales may be down here, but operating profit rose 9.1% to $ 347 million, and that’s the change HPE is looking for. Frankly, enterprise server space will be much more profitable than HPC and AI cluster space, unless five decades of history is reversed. What he won’t do.

High Performance Computing & Mission Critical Systems Group, which combines SGI and Cray supercomputer businesses with sales of NUMA high-end Superdome servers, achieved $ 741 million in revenue, up 11.1% . But operating profit is low here, at just $ 29 million, and has fallen significantly by 38.3%.

We’ve said it before and we’ll say it again: someone needs to invest in HPC architectures and now AI because that work needs to be done, but this is a very difficult market to tap into, unless you be the semiconductor manufacturer responsible for the compute engines or the memory chips or maybe the flash drives. To illustrate this point, Compute group operating profit was 11.2% of sales compared to 3.9% of sales for HPC & MCS group operating profit.

So while it’s wonderful that HPC and MCS activity is on the rise, driven by “a record number of new orders,” as Neri put it on a conference call with Wall Street analysts passing by. reviewing the numbers, and it’s wonderful that the backlog has closed $ 2.5 billion in deals over the next few years, and it’s wonderful that HPE has an 80% success rate on class systems exascale where he is bidding on them, if you do the math, 3.9% of $ 2.5 billion is only $ 98 million. Profit margins on these transactions need to increase, but this may not happen until “Shasta” systems are more widely deployed in businesses, governments and universities, where small transactions generate slightly more profits. students.

It is still the bet in terms of profitability of HPC and now of AI. Intel and Nvidia derive most of the benefits from these HPC and AI systems. And competition for compute engines will make iron cheaper, but it won’t necessarily increase HPE’s profit margins. In fact, we doubt that this is the case. On the contrary, compute engine vendors, under increasingly competitive pressure as more processors, GPUs and FPGAs are put to use, will rely more on the margins of their OEM partners, not less. .

Like we said, send thank you notes.

And for the next several years, HPE will suffer from the shift from transactional equipment sales over the capital expenditure budgets of its IT customers to the new GreenLake subscription model, which is necessary and good, which will go on the operating expense budget with HPE. keep ownership of the equipment as it is paid for in the cloud. HPE added 200 new GreenLake customers, bringing the total to 1,100, and GreenLake’s annualized revenue execution rate was $ 705 million, up 33% year-on-year. We believe this is dragging down hardware sales, just as the move from a perpetual license to a subscription license has done with all of the major software vendors. Eventually, everything will stabilize. As with the $ 2 billion deal that HPE just struck this week with the National Security Agency in the United States for cloudy pricing on all kinds of HPE equipment to be installed in a private NSA data center.

Neri wants to have a compound annual growth rate for this GreenLake business of between 30 and 40% between fiscal years 2020 and 2023 inclusive.

Tracking system sales is going to get very complex, but for now GreenLake’s numbers go to the appropriate HPE groups and divisions based on the labels on the equipment and on the appropriate revenue accounting. At some point, in the distant future, maybe all the material will be sold that way. Why not? Why own it when you can get all the benefits of ownership – control, location, security – without any pressure on the balance sheet. It makes sense to us. Let HPE’s balance sheet take the heat.

As always, what interests us is how the core systems business at HPE is doing, and this table, which we’ve updated with the most recent operating revenue for servers, update network and storage, gives you an idea:

If you add all that up, HPE’s systems core business fell 3.6% to a hair’s breadth of over $ 5 billion, but operating profit rose 3.6% to $ 554 million. dollars, or about 11% of sales. We don’t have operating revenue data going back to 2009, but we’ll see if we can find and update it.


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