How Next Initiative Is Helping HPE Boost Operating Margins

Hewlett Packard Enterprise (HPE), which along with HP Inc. (HPQ), was split-off in 2015, unveiled its HPE Next initiative in the third quarter of fiscal 2017. The initiative was launched to help HP Enterprise save approximately $1.5 billion over the next three years. HPE Next has helped the company to simplify its organizational structure and redesign business processes to improve margins. With the help of HPE Next, the company was able to utilize the 20% YoY growth in R&D to invest in organic innovation. Cost savings through the HPE Next program, along with share repurchases, are expected to boost earnings over the coming quarters.

Hewlett Packard has been facing improvement in operating margins for the past four consecutive quarters. However, in the recent first quarter, operating margins declined from the preceding quarter, as we can see in the chart. HPE’s operating margin expanded from 7.3% in Q1 2018 to 8.9% in Q1 2019 but contracted from 10.1% in Q4 2018.

The YoY improvement in operating margins comes on the back of improved gross margins as the company emphasized the high-margin value areas such as hyperconverged, compute, and composable infrastructure in the quarter. The company’s consistent focus on cutting costs through its HPE Next Initiative as well as its improved supply chain has also helped the company reduce its operating leverage.