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What Is Driving Growth for HPE’s Enterprise Services Segment?

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Mar. 24 2016, Updated 1:04 p.m. ET

Diversified customer base is key to stable revenues

The Enterprise Services segment of Hewlett Packard Enterprise (HPE) accounts for approximately 35% of total revenues. This segment has been building a diversified customer base for the company, resulting in stable revenues and thereby reducing its cost structure. In fiscal 2013, three customers accounted for 65% of the segment’s operating profit. However, as of fiscal 1Q16, no single account makes up more than 10% of the total operating profits.

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HPE is also continuously making progress on its cost structure by exiting high-cost data centers, improving low-cost location mix, and rebalancing its workforce. This led to YoY growth on a constant currency basis in fiscal 1Q16. HPE also experienced its seventh consecutive quarter of YoY margin expansion. In fiscal 1Q16, operating margin stood at 5.1%, an improvement of 2.1 basis points YoY.

The CEO of HPE, Margaret Whitman, stated, “Overall, I believe we are taking the right steps to achieve our long-term goal of a sustainable market-competitive cost structure with the 7% to 9% operating profit margin.”

Agreement with Sabre and Avon

In fiscal 1Q16, HPE’s new business TCV (total contract value) rose 4% YoY (year-over-year) on a constant currency basis. HPE entered into an agreement with Sabre (SABR) to provide virtualization, automation and security services, hardware, and software to support faster product development and extend Sabre’s position in the global travel industry.

Hewlett Packard Enterprise also has an agreement to transform key elements of Avon’s (AVP) global IT infrastructure by offering dedicated data center services, cross-functional support, network management, and security services.

HPE constitutes 0.8% of the iShares US Tech ETF (IYW). The top holdings of this ETF include Apple (AAPL) and Microsoft (MSFT), which account for 16.9% and 12.5% of the ETF, respectively.

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