UPDATED 18:23 EDT / MARCH 03 2020

INFRA

HPE revenue decline disappoints as server and storage sales sink

Analysts were expecting Hewlett Packard Enterprise Co. to report its fifth straight quarter of declining sales today, but they weren’t prepared for the extent of the decline.

HPE shares fell  nearly 5% in early after-hours trading after the computer systems provider reported a nearly 9% drop in revenues in its fiscal first quarter, to $6.95 billion, from a year ago. Analysts were expecting sales of $7.21 billion.

HPE did manage to beat earnings estimates slightly, reporting a profit of $575 million, or 44 cents a share, down a bit from $590 million and 42 cents a share a year ago. In its press release, the company touted a 19% increase in annualized revenue run rate and stronger gross margins.

But those gains were offset by weakness in its core compute and storage businesses, which together comprise 60% of revenues. Server sales were down 15% on a constant currency basis and storage sales dropped 7%. The company blamed “market uncertainty, supply constraints and North America manufacturing capacity constraints.”

HPE isn’t alone. Dell Technologies Inc. last week reported an 11% sales decline in its Infrastructure Solutions Group, which sells servers and storage, driven by a 19% plunge in server and networking revenue. But th0ugh Dell attributed the bulk of the decline to a 35% crash in sales in the Chinese market, HPE said Asia-Pacific revenues fell only 2% overall and rose 2% excluding China.

With the coronavirus casting uncertainty over Asian supply chains in particular, HPE cut its free cash flow projections for the year to between $1.6 billion and $1.8 billion down from its earlier forecast of $1.9 billion to $2.1 billion. However, it maintained its estimates of full-year adjusted profits of $1.78 to $1.94 per share.

Chief Executive Antonio Neri (pictured) said he was “disappointed” by the decline in compute revenue but chose to accentuate the positive, including “profitable growth in key areas of investment, including Intelligent Edge, high performance compute, hyperconverged infrastructure, big data storage and operational services orders.”

The Intelligent Edge, which comprises sensors and other smart devices at the edge of the network, saw sales grow 4% on a constant-currency basis. Sales of hyperconverged systems ticked up 6% and financing volume was up 2%. “I am confident we are managing our business with discipline and focus,” as HPE pursues its goal of delivering all of its company’s products as services by 2022, the CEO said.

Neri said storage sales tied to big data projects grew 45% on the strength of MapR Technologies Inc., the distressed storage software company it acquired in August. Supercomputer maker Cray Inc., which HPE purchased last spring, closed $2 billion in new orders that will be delivered over the next three years. “We continue to have a significantly differentiated portfolio,” Neri said.

The 5% fall after-hours came on top of a 2.3% drop in HPE stock during a trading day when the Dow fell 785 points, or almost 3%. HPE shares are down 20% over the past 12 months, while the broader S&P 500 index is up 7.5%, even after last week’s selloff.

However, Chief Financial Officer Tarek Robbiati said market volatility makes forecasting difficult. “Geopolitical factors continue to cause uncertainty, particularly in large enterprises,” he said. “This was exacerbated by supply chain irregularities and component shortages, which we expect to alleviate through the rest of the year.”

Neri expressed confidence that supply chain volatility is a short-term phenomenon. In the second half of the year, he said, “we expect things to return to a level of normalcy.”

Image: HPE on Facebook

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