Competition from heavyweights
We’ve discussed how Hewlett Packard Enterprise (HPE) has gained market share and increased its hyperconverged infrastructure revenue. HPE was named a leader in Gartner’s Magic Quadrant in the hyperconverged and all-flash array markets. In fiscal 1Q18, HPE achieved 11% YoY (year-over-year) revenue growth in its compute vertical.
During its first-quarter earnings call, HPE stated that the legacy product and high-growth segments each account for 50% of its revenue. The company is banking on storage products to drive revenue growth and offset the decline of legacy product revenue, which fell ~7% in fiscal 2017.
However, HPE is competing with heavyweights Amazon (AMZN), Google (GOOG), and Microsoft (MSFT). These companies have easily achieved revenue growth due to the industry-wide shift toward outsourcing IT infrastructure. While Microsoft’s Intelligent Cloud revenue grew 9.6% YoY to $27.4 billion in fiscal 2017, Amazon Web Services achieved revenue growth of 9.8%.
Meanwhile, analysts expect HPE’s revenue to rise marginally this fiscal year, and by 1.5% YoY in fiscal 2019. HPE is also fighting competition from VMware (VMW) and Nutanix, which sell products and solutions at lower prices.
Due to higher DRAM (dynamic random-access memory) costs and unfavorable currency fluctuations, HPE’s profit margin has narrowed YoY over the last few quarters. In the first fiscal quarter, HPE’s gross margin narrowed 370 basis points YoY to 28.4%, while its operating margin narrowed 180 basis points to 7.7%.
The HPE Next initiative, launched in fiscal 2017, aims to save $1.5 billion over three years by reshaping HPE’s organizational structure and improving its margins by selling wide-margin products to tier-one customers.
HPE will be coping with component cost dynamics, a competitive cost environment, and stranded costs as it strives to improve profitability in the short term. This fiscal year, it aims to expand its operating margin YoY from 7.5% to 9.5%.