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Will HPE Next Initiative Prevent Falling Operating Margins?

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HPE’s operating margin trend

Hewlett Packard Enterprise (HPE) has been facing a decline in operating margins for the past few quarters. As we can see in the chart, HPE’s operating margin increased marginally in fiscal 3Q17. However, operating margins have otherwise been consistently falling sequentially, mainly due to higher DRAM costs, rising research, development expenses, and unfavorable currency.

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HPE’s margins in 1Q18

Hewlett Packard Enterprise’s gross margin fell 370 basis points to 28.4% YoY (year-over-year), whereas its adjusted non-GAAP operating margin contracted 180 basis points to 7.7%, primarily due to competitive pricing, elevated DRAM costs, and unfavorable currency.

HPE Next could lead to cost savings

Hewlett Packard Enterprise launched its HPE Next initiative during the third quarter of fiscal 2017, which could help the company save approximately $1.5 billion over the next three years. HPE Next could simplify and reshape the organizational structure, which could improve margins. The initiative will deliver profits by selling high-margin products to Tier 1 customers.

According to analyst Ananda Baruah from Loop Capital Markets, the HPE Next program is expected to result in significant cost savings for the company. These savings, along with share repurchases, are expected to positively affect HPE’s EPS (earnings per share) over the next few years. HPE expects revenue growth in each of its business segments, while its Tier 1 Cloud vertical is also returning to revenue growth.

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