Some data center workloads just aren't good fits for being hosted on public clouds and HP Enterprise (HPE - Get Report) is well-positioned to support them, its CFO insisted following a mixed earnings report released after the bell on Thursday.
HPE reported April quarter (fiscal second quarter) revenue of $7.15 billion (down 4% annually) and non-GAAP EPS of $0.42 (up 31%). Revenue missed a consensus analyst estimate of $7.39 billion, but EPS, which benefited from margin growth and stock buybacks, topped estimates of $0.36.
The IT hardware giant also guided for July quarter EPS of $0.40 to $0.44, which compares with a consensus of $0.41, and it hiked its fiscal 2019 (ends in Oct. 2019) EPS guidance by $0.06 to a range of $1.62 to $1.72. At the same time, the company reiterated full-year free cash flow guidance of $1.4 billion to $1.6 billion.
HPE's shares closed up .49% on Friday to $14.39. They went into earnings down 9% over the prior 12 months, and roughly flat over the prior two years.
Following HPE's report, I had a chance to talk with Tarek Robbiati, who last September became HPE's CFO after having previously served as Sprint's (S - Get Report) CFO. Here's a recap of some of the subjects discussed.
The Impact of Public Cloud Adoption
Robbiati asserted that the migration of enterprise workloads, which often rely heavily on internally-designed servers and storage rather than hardware developed by traditional IT giants, to public clouds, hasn't accelerated relative to prior rates. He also reiterated HPE's stance that hybrid cloud deployments will be the norm for businesses, and -- though Amazon.com (AMZN - Get Report) and others have been trying to get these workloads to migrate as well -- argued that workloads involving giant amounts of data are likely to stay on-premise.
"There are quite frankly some workloads that are so data-intensive that it makes zero sense to have them move to the cloud," Robbiati said. He also noted HPE's recent $1.3 billion deal to buy supercomputer maker Cray (CRAY - Get Report) , whose systems are used to handle computing and storage-intensive high-performance computing (HPC) and AI-related applications, fits with the company's efforts to address workloads that organizations are likely to keep running locally.
HPE's "Hybrid IT" segment -- it covers the firm's server, storage and IT services businesses, and produces the lion's share of its revenue -- saw revenue drop 4% annually last quarter to $5.64 billion, as strong demand for products such as HPC systems and HPE's innovative Synergy systems was offset by weaker demand elsewhere. On the earnings call, CEO Antonio Neri said (in line with remarks made a day earlier by NetApp (NTAP - Get Report) CEO George Kurian) that macro uncertainty, elongated sales cycles and currency swings were weighing on revenue. He also said HPE's decision to pare back its efforts to sell to "tier-1" cloud providers remained a headwind.
Lower Memory Prices
Though lower DRAM and flash memory prices have been a tailwind for HPE and other IT hardware firms (and a headwind for the likes of Micron (MU - Get Report) and Samsung (SSNLF) ), Robbiati says that only about one-third of the 2-percentage-point annual improvement HPE saw in its gross margin (from 30.2% to 32.2%) came from supply chain efficiencies and lower commodity prices. The rest, he says, stemmed from changes in HPE's portfolio mix towards higher-margin offerings.
"We still see commodity prices deflating. We don't think this is a trend that is going to change fundamentally in the medium-term. Long-term, it's a different story potentially," he added. Robbiati also declared HPE to be "fairly insulated" from an uptick in commodity prices, given the extent to which its sales mix skews towards costlier systems for which memory costs might be a relatively small percentage of the system's final price.
The 'Intelligent Edge' Segment's Performance
HPE's Intelligent Edge segment, which covers sales of networking hardware and software, saw revenue drop 6% annually to $666 million, easily missing a $754 million consensus. On the call, Neri blamed the weakness on sales execution issues in North America, along with "changes in market dynamics."
The numbers arrived a week after rival Cisco Systems (CSCO - Get Report) indicated it saw strong April quarter demand for its Ethernet switches and Wi-Fi systems. Nonetheless, Robbiati, observing that Intelligent Edge revenue grew in the EMEA and Asia-Pacific regions, insists the business didn't see any change in its competitive environment last quarter.
HPE's Chinese Joint Venture
On HPE's call, Robbiati disclosed that HPE is choosing to sell less hardware to its H3C Chinese joint venture, which (following a 2016 deal with China's Tsinghua Holdings) it holds a 49% stake in. Robbiati added that while this decision will hurt HPE's revenue, it will boost its bottom line, since hardware sales to H3C feature "preferential prices" and a shift in H3C's sales mix to products it directly manufactures will boost the profits (and related cash dividends) HPE gets on account of its 49% stake.
"There's very little margin contained in the revenue we generate by selling to the joint venture," Robbiati said when asked about the change in strategy. He also indicated that there aren't any products in particular that HPE has singled out to sell less of to H3C. "We just carry on with the business as usual...it's just the sheer quantity of what we push through the joint venture is not the same because we optimize the joint venture for profitability," he said.