Editor’s note: HP Enterprise is selling its business services division to Computer Sciences Corp. in a deal worth $8.5 billion. HPE is one of two companies formed when HP split. The other division focuses on Pcs and printers. What’s this latest deal mean to CEO Meg Whitman’s HPE? Analyst Krista Macomber of Technology Business Research takes a look.
HAMPTON, N.H. – HPE announces plans to divest its Enterprise Services arm to improve beyond its 1Q16 revenue and profit growth.
HPE posted its first quarterly year-to-year revenue growth in more than one year in 1Q16, facilitated by its focus on executing in a more agile manner on customer transformation initiatives as well as competitive displacement opportunities.
This emphasis on nimbleness has led HPE to prepare for a major shift in its portfolio and go-to-market strategy, announcing during its 1Q16 earnings call its intent to sell its Enterprise Services professional services arm to CSC in a deal that is expected to close in March 2017.
TBR believes the pending sale will position HPE to execute in a more concentrated manner on converged and software-defined data center opportunities from an infrastructure standpoint, but create hurdles as customers seek upfront advisory support during their IT modernization initiatives, and as customers desire to increase leverage of “as-a-service” IT delivery.
TBR research indicates that data center customers turn to HPE for more than turnkey appliances, working with the vendor on broader consulting and enablement in support of wide-spread IT transformation that spans on premises and off premises resources, as well as pre-sales consulting. As a result, TBR believes that HPE’s go-forward path over the next one to three years will center on avoiding missteps in execution by working closely with channel partners, service provider partners, and customers to navigate this transition.
During 1Q16, HPE (NYSE: HPE) accelerated its Enterprise Group revenue from 1% year-to-year in 4Q15, to 6.5%. Server revenue accelerated to growth of 6.9% year-to-year, following a 0.8% decline in 4Q15, while storage revenue reversed four consecutive year-to-year revenue declines, rising 1.6%.
Both businesses were bolstered by momentum in next-generation portfolio areas including converged infrastructure and high-density servers. Networking performance remained exaggerated by HPE’s May acquisition of Aruba, rising 57.2% year-to-year. However, software revenue declined 13.2%, pointing to ongoing challenges resulting from HPE’s revenue base transition to “as-a-service” subscriptions.
With the pending Enterprise Services divestiture, and the ongoing commoditization of data center hardware, TBR believes that HPE is becoming increasingly pressured to reverse steep software revenue declines and position the software unit as a core profit driver for the company.
However, this will be challenging as HPE Software navigates the ongoing industry transition to subscription-based software purchasing models, and competition with CSC’s ISV partners to drive pull-through and synergies. Positioning as a high-value partner to CSC will increasingly influence HPE’s success as it works to deliver on end customer demand for comprehensive, software-driven solutions wrapped with value-add services.
HPE launches its Universal Platform to address burgeoning IoT opportunities with greater nimbleness and focus
As customers seek increased connectivity and leverage of their data, commercial IoT deployments will generate a rising share of global data center hardware spend while creating net new revenue opportunities for vendors in areas such as cloud services and business consulting. For its part, HPE has launched a dedicated portfolio umbrella, its HPE Universal IoT Platform, to increase its ability to address this growing opportunity.
TBR views this launch, and HPE’s subsequent more focused execution in the IoT market, as important to the vendor in sustaining year-to-year revenue growth; TBR’s Commercial IoT 1Q16 Market Forecast predicts the commercial IoT solutions market to grow at a CAGR exceeding 20% between 2016 and 2021, with opportunities spanning hardware, software and services.
HPE, to date, has had access to and participated in the IoT market through its position as the largest combined server and storage vendor globally, as well as through its services organization. As long-standing HPE customers have looked to cultivate specific IoT strategies, HPE has acted as a support partner through these infrastructure and services competencies.
This strategy has been supported in part by HPE’s launch of specific reference architectures, such as its Cyber Reference Architecture for IoT, which is designed to address rising cyber attack threats created through the growth of IoT implementations. However, HPE has lacked a dedicated entity to pursue IoT opportunities with focus and agility. HPE has begun to address this challenge by launching its Universal IoT Platform, designed for machine-to-machine (M2M) devices and secure cloud platforms.
In addition to building from HPE’s robust telecom practice and data center infrastructure business, the platform also has the opportunity to integrate with other broad corporate initiatives, such as HPE’s Helion cloud business, to address customer demand for more holistic solutions capabilities provided by a single vendor or smaller roster of vendors. As HPE prepares to divest its enterprise services arm, TBR believes that building a cohesive strategy with CSC will help HPE to continue executing on a cohesive IoT strategy.
HPE seeks to expand its foothold in hyperconverged platforms through the launch of new appliances
HPE is targeting some of the fastest-growing segments of the global data center market, including hyperconverged platforms, to grow EG revenue. HPE is uniquely positioned as the only hyperconverged platforms provider to offer hyperconverged solutions based entirely on its own technology, as peers ranging from Dell and Cisco to Nutanix and SimpliVity must rely on partnerships to deliver complete hardware and software capabilities.
This enables HPE to approach customers with a clear, unified portfolio. Building from this stance, HPE has expanded its hyperconverged platforms portfolio to specifically address midmarket customer and remote and branch office requirements with its Hyper Converged 380 (HC 380) offering. Through enhancing its portfolio offerings, HPE continues to be seen as innovative and build its reputation for performance, expanding its addressable customer base by accommodating a broader range of customers’ IT requirements.
HPE faces aggressive competition in attributes ranging from cost effectiveness through performance, especially in the price-conscious midmarket customer segment. Messaging compelling TCO, efficiencies, and the ability to support a broad range of traditional and cloud-native workloads will help HPE to differentiate from major OEMs as well as niche hyperconverged platforms vendors.
For example, HPE’s new midmarket offerings leverage SSDs to boost performance, and enhanced StoreVirtual capabilities such as VSA Data Protection Shield, which enables offsite replication. Additionally, the new HC 380 system is built on HPE’s ProLiant DL380 server, which TBR believes differentiates HPE through enabling production efficiencies that can be passed along in the form of cost savings to customers.