UPDATED 12:01 EDT / OCTOBER 19 2016

INFRA

HPE’s 2017 outlook signals a change in direction

Hewlett Packard Enterprise Co. aims to become a more focused company next year, targeting the hybrid cloud, the Internet of Things and services more than its traditional hardware.

That was the message at the company’s annual meeting with Wall Street analysts this week, where HPE Chief Executive Meg Whitman and her top executives provided an update on the big organizational changes that are set to occur in coming year, including cost-cutting and likely more layoffs.

This initiative most recently saw HPE announce a workforce reduction on Monday that reportedly cost least 65 employees their jobs. Most were apparently part of the North American team that maintains the company’s Stackato platform, a hosted middleware stack for building cloud applications. The solution is among the many that are set to be offloaded in the upcoming $8.8 billion sale of its software business to Britain’s Micro Focus International PLC. At the same time, HPE is merging its services business with Computer Sciences Corp. as part of a deal that was first revealed in May.

Both transactions are based on the Reverse Morris Trust model, a type of agreement that combines a spin-off with an acquisition to reduce tax expenses. But despite its efforts to make the restructuring go as smoothly as possible, HPE still expects to take a significant financial hit from the disinvestment. Chief Financial Officer Tim Stonesifer revealed during this week’s analyst meeting that the company will have to put $2.5 billion into a pension fund for workers of its services business. As a result, he forecasts that it will end up with a negative free cash flow of approximately $1.8 billion in fiscal 2017.

Then there’s the fact that the businesses HPE is offloading will no longer contribute to its bottom line. Because of the anticipated sale, the company adjusted its earnings forecast for 2017 from $2 to $2.10 per share to $1.45 to $1.55, which is more or less in line with what analysts predicted. But Barclays Capital Inc. sounded a cautious note about the restructuring in a memo to shareholders following the meeting. “These corporate actions, alongside consistent messaging related to pragmatic, tuck-in M&A, have constructed a narrative that has been attractive for value-focused investors, but we continue to struggle with what factors might drive the stock from here,” the bank wrote.

Over on the organizational side, meanwhile, HPE will refocus all of its resources on scaling up its core data center businesses. Meg Whitman said that the company will place a particular emphasis on supporting hybrid cloud environments that combine on- and off-premise resources. According to her slide deck (pdf), the company’s strategy rests on three main pillars: its data center hardware portfolio, software-defined infrastructure solutions and partnerships with public cloud providers. The latter point refers first and foremost to the far-reaching strategic alliance with Microsoft Corp. that HPE announced last November.

Later in the presentation, Whitman added that the company will also work to help organizations harness the growing amounts of data that are being generated by their connected devices. HPE teamed up with General Electric Digital in June as part of this effort to deliver joint solutions based on the latter’s Predix analytics platform. They’re going up against vendors such as IBM Corp. are working just as aggressively to monetize the Internet of Things.

Image via HPE

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