HPE reports 10 per cent revenue fall - days after HP Inc posts rise

It was supposed to be HP Inc that struggled and HPE, freed from boring PC manufacturing, that soared

Hewlett Packard Enterprise (HPE), the enterprise-focused half of demerged HP, has reported a quarterly revenue drop, down by 10 per cent, in financial results for its fiscal 2017 first quarter.

The results make it four out of five quarters since the demerger that HPE has reported declining revenues - while its 'other half', HP Inc, earlier this week reported a strong quarter.

HPE reported revenues down by a chunky 10.4 per cent to $11.4bn in the three months to the end of January, compared to $12.7bn in the same quarter a year ago. Due to vigorous cost-cutting, especially in sales, earnings remained flat at $267m. Research and development was also slashed, down by 17 per cent from $585m to $485m.

HPE CEO Meg Whitman claimed that the company "remains on the right track". She added: "The steps we're taking to strengthen our portfolio, streamline our organisation, and build the right leadership team, are setting us up to win long into the future."

However, the company was keen to highlight three "significant headwinds" that have blown-up since October 2016: adverse foreign exchange movements, the higher price of commodities, "and some near-term execution issues".

More specifically, the company claimed that there was an "order shortfall" from a major customer during the quarter, and that memory components have become harder to get hold of and, hence, more expensive.

Those execution issues, though, would appear to be affecting the company across the board, with Enterprise Hardware down 12 per cent to $6.3bn, Enterprise Services down 11 per cent to $4bn, and Software down eight per cent to $721m, although only by one per cent when divestitures and currency movements are taken into account.

And the company warned investors that the fall in revenues won't be made good by the end of the financial year, with Whitman hinting in the earnings conference call that "there may potentially be more costs to come out".

Analysts on the call, however, weren't convinced by the company's explanations.

"Most people were aware of a much tougher commodity environment in November," said Toni Sacconaghi, an analyst at Bernstein Research.

He continued: "Your sister company… had been calling that out well before November and had made provisions to adjust for that both in pricing and in building inventory. So I guess the question is, the only thing that really seems new, or that you shouldn't have known about, was either the market changing or execution?"

While HPE focuses on enterprise software and systems, HP Inc produces PCs, laptops and printers under the well-known HP brand. The expectation was that HPE would flourish and grow, while HP Inc would probably struggle in a cut-throat hardware mass-market hardware business where margins are razor thin.

However, the reverse so far appears to be the case.

HP Inc reported revenues up over the same period by 4 per cent, year on year, to $12.7bn. Despite the fiercely competitive market in which it operates, it was also more than twice as profitable, with net income rising to $611m.