High component costs have been impacting profit margins for Hewlett Packard Enterprise (HPE). Increases in DRAM (dynamic random access memory) pricing this year has driven the company’s commodity costs upward. The chart below shows the increases in DRAM prices. Those prices are estimated to rise in the second half of 2017 since the expansion of production capacity will be limited.
Declining margins in Enterprise Group segment
We’ve seen that HPE’s Enterprise Group’s (or EG) operating margin has fallen significantly over the last few quarters. In fiscal 3Q17, the EG business accounted for more than 80.0% of HPE’s total revenue.
To improve its profit margins, HPE said earlier that it would save between $200.0 million and $300.0 million in costs during the second half of fiscal 2017. Although profit margins in fiscal 3Q17 rose 50 basis points to 9.3%, HPE aims to increase those margins over the next few quarters.
Expenses related to acquisition dilution as well as stranded costs are expected to fall in fiscal 4Q17 and beyond. In fiscal 2018, HPE expects operating margins between 11.0% and 12.0%. During the recent Deutsche Bank (DB) Technology Conference, CFO (chief financial officer) Tim Stonesifer said that “if currency stays where it is today, if rates hold, that should provide some tailwind next year. And then when you think about the run rate impact of the $200 million to $300 million of costs that we’re taking out this year, that will be favorable.”