If you've recently seen a bear case made for a traditional enterprise IT giant such as IBM (IBM) , HP Enterprise (HPE) , Cisco Systems (CSCO)  or Oracle (ORCL) , chances are that it at least mentioned the large and growing adoption of public cloud infrastructure services that don't rely on these companies' hardware.

HPE's latest earnings report actually makes such an argument look too modest in scope. The company not only reported sales figures that point to further cloud-related cannibalization, but also made earnings call remarks that lead many to think a big cloud provider -- quite possibly Microsoft (MSFT) -- is paring back its orders.

HPE, which for now contains the old Hewlett-Packard's IT hardware, software and services arms, reported fiscal first quarter (January quarter) revenue of $11.41 billion (down 10% annually) and adjusted EPS of $0.45. The latter slightly beat a $0.44 consensus thanks buybacks and major spending cuts, but the former missed a $12 billion consensus.

HPE also cut its fiscal 2017 (ends in October) adjusted EPS guidance to a range of $1.88 to $1.98 from a range of $2.00 to $2.10 (consensus was at $2.02). Second quarter EPS guidance is at $0.41 to $0.45 (consensus was at $0.45). Full-year free cash flow, hurt by pension funding payments, restructurings and costs related to pending spinoffs, is still expected to be at negative $1.8 billion.

Shares fell 6.9% today to $22.96. They went into earnings near a 52-week high of $24.88.

The weak performance of HPE's Enterprise Group, which provides IT hardware and related services, contributed to the shortfall. The division's sales fell 12% annually -- worse than the October quarter's 9% decline -- to $6.3 billion, missing a $6.6 billion consensus. Server, storage, and services revenue respectively fell 12%, 13% and 2%.

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The server decline might have been a little worse if not for last year's $275 million acquisition of SGI. Going forward, the business should get a boost from HPE's $650 million purchase of hyperconverged hardware vendor SimpliVity. Networking revenue fell 33%, but was up 6% if one backs out forex and the sale of a 51% stake in HPE's Chinese H3C Technologies unit to Tsinghua Unigroup. Networking got a lift from a 20% sales increase for the Aruba Networks Wi-Fi unit, acquired in 2015 for $3 billion.

The Enterprise Services unit, which will soon be spun off and merged with Computer Sciences (CSC) , saw revenue drop 11% to $4 billion, below a $4.6 billion consensus. The software unit, a large chunk of which will be spun off and merged with British software firm Micro Focus, saw revenue drop 8% to $721 million, below a $755 million consensus. Financial services revenue was a bright spot, rising 6% to $823 million, above a $776 million consensus.

On the earnings call, CEO Meg Whitman partly blamed the sales weakness on a strong dollar, echoing comments from many peers. She also noted high DRAM prices took a toll -- server DRAM prices have surged -- and that NAND flash supply constraints hurt flash storage sales.

But importantly, Whitman also mentioned HPE also saw "significantly lower demand" from a "major tier 1 service provider facing a very competitive environment." Later, she added HPE is now seeing a "different buying pattern" from the service provider, and that this falloff could "throw us into slightly negative growth for [fiscal] 2017."

Though not mentioned by name, there's a good chance the tier-1 client is Microsoft. The software giant's Azure unit is the world's second-biggest public cloud provider, and the three other biggest cloud spenders -- Amazon (AMZN) , Alphabet/Google (GOOGL) and Facebook (FB)  -- are believed to be overwhelmingly (if not exclusively) reliant on "white-box" servers from Asian contract manufacturers that are built to each cloud providers' specs.

Apple (AAPL) , reported in the past to be using HPE servers, is an outside possibility to be the major customer reducing its demand. But Microsoft is the more likely candidate, given remarks about the service provider being HPE's biggest, and facing tough competition. A big round of Azure price cuts were announced just two weeks ago, as Microsoft contends with Amazon and Google's own aggressive pricing.

Historically, Microsoft has heavily relied on servers from HPE, as well as certain other OEM partners such as Dell, for both its internal IT needs and to provide web/cloud services to third parties. Arguably, these relationships have been a quid pro quo for the OEMs' bundling and reselling of Windows Server and other Microsoft software. Deutsche analyst Sherri Scribner estimates Microsoft has historically accounted for 10% to 15% of HPE's server revenue.

While Microsoft has been deploying some white-box servers for years, the company seems to have stepped up its efforts lately. In October, the company unveiled Project Olympus, a design for modular servers featuring internally-designed motherboards and power supplies. Olympus is being contributed to the Open Compute Project (OCP), a Facebook-led initiative to create open-source designs for low-power data center hardware.

From the standpoint of an HPE or Dell, several things are troubling here. First, Microsoft now appears to be making its cloud infrastructure as cost-efficient as possible a higher priority than keeping big OEM partners happy.

Second, and perhaps more importantly, Microsoft (like its top cloud rivals) seems to have concluded the value proposition delivered by OEM hardware can't match what it gets from white-box gear. In HPE's case, this is in spite of the fact that the company has partnered with giant contract manufacturer Foxconn to create cheap servers targeting hyperscale infrastructures such as Microsoft's.

The direct and indirect pressures being placed on HPE by cloud giants give valuable context to the company's aggressive job cuts, pending spinoffs and attempts to expand its hardware lineup via M&A. HPE is well aware that it needs to make big changes to deal with the cloud threat. But that doesn't mean a lot of pain won't be inflicted in the near-term.

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