It’s a challenging environment for many businesses right now, and has been since the outbreak of the coronavirus pandemic more than two years ago. And now the war in Ukraine will add another layer of uncertainty to trade. And yet, data is collected and needs to be processed for competitive advantage – that hasn’t changed and it won’t change.
IT vendors that are flexible with their offerings – particularly those that conserve capital and shift expenditures from CapEx to OpEx, offloading capital expenditures to some extent onto IT vendors or those that lease and finance hardware – will do better in such an environment. And that, in a nutshell, is precisely why Hewlett Packard Enterprise has spun off in droves over the past twelve months under relatively new CEO Antonio Neri.
Over the past six years, HPE has deliberately separated software, outsourcing, PCs and printers to focus on the company’s core business which is an amalgamation of the server businesses of the former Hewlett Packard, Compaq, Digital Equipment, SGI and now Cray, plus a bunch of cutting-edge networking stuff and a merged services company called PointNext. Much smaller HPE isn’t particularly profitable, but again the volume enterprise server business and the HPC systems business has never been very profitable, so it’s not a surprise for us. We’ve often said that system buyers should send HPE – along with Dell, Lenovo, Inspur and IBM – Thank you note because, based on their finances, they often build systems as much for love as for money.
But, HPE is making more money and keeping more of it in recent quarters, and also making the transition to selling everything in the catalog under its GreenLake cloud services pricing model, and that seems to be resonating with customers in this uncertain time. . Although HPE does not account for most of this GreenLake revenue “as a service,” since it is prorated over contract terms ranging from 36 months to 60 months, deferred revenue is beginning to build.
During the first quarter of fiscal 2022 ending January, HPE added another 100 GreenLake customers, bringing the total to 1,350. While GreenLake is a significant annuity-type revenue stream for HPE, it is not the only it has, and if you add up all the “as a service” revenue that has been recognized, and then display the annualized revenue rate (ARR) for those sales, you get charts that look like this:
Orders for “as a service” priced products were up 136% year-on-year in the first quarter of fiscal 2022, and the run rate was $798 million. Almost two-thirds of that is for networking systems and software, and the rest is for infrastructure and regular funding – think of it as “cash as a service”, we suppose. . The backlog for these AAS offerings at HPE increased by 100 customers and $500 million – which is another way of saying, in our view, that the new customers were all GreenLake customers – and the total value of the contract of all AAS products sold to customers was $6.5 billion. (It’s unclear if this is a net figure of revenue already accrued, but it should be if the AAR is to be a meaningful figure.) The plan is that the AAR for the portion AAS of the HPE business has a compound annual revenue. growth rate of 35-40% between FY2021 and FY2024, which puts it at around $2.2 billion as HPE exits its FY2024 in October 2024. And if the backlog for the AAS products are evolving as the execution rate does, it is expected to be around $18 billion at that time.
“That’s why I said when I think about the future of this company, the product is HPE GreenLake,” Neri said on the call with Wall Street analysts reviewing the financial results. “Everything is delivered through HPE GreenLake, whether it’s connectivity through a subscription model, whether it’s compute and storage that you can elastically consume with data services run by above, whether it is the services to be operated in an HPE GreenLake. HPE GreenLake is becoming a platform of choice for many customers because it offers this flexibility and in an edge-to-cloud architecture. And that includes, by the way, the public cloud. And that’s why when you see the innovation that we’re going to bring in the next two weeks, that includes the public cloud in how we handle that.
It will be interesting to see what HPE does here, but the implication is that either the GreenLake systems will be someone’s cloud or HPE will buy capacity on someone’s cloud and make the management of it all cohesive within a single GreenLake management framework. (The latter is an interesting concept. Are you allowed to resell AWS capacity? Think of the volume discount HPE could get if it bought giant blocks of Amazon Web Services, Microsoft Azure, and Google Cloud.)
In the quarter ended January, HPE reported overall sales of $6.96 billion, up 1.9%, and net profit more than doubled to $513 million. Part of that revenue is due to price increases it passes on to customers, and part is due to intense cost controls and effective supply chain management. The company has burned some cash to help boost its parts inventory, which HPE is building up as customers give it more visibility into their infrastructure plans amid rampant shortages in the IT industry. right now. With lead times ranging from 52 to 70 weeks for many components, end-user customers have no choice but to come up with a plan and let their IT vendors know as far in advance as possible.
The Compute division, which primarily includes ProLiant servers based on Intel Xeon SP and AMD Epyc processors, grew 1% to $3.02 billion in the quarter, but operating income rose 21 .6% to $416 million. X86 server orders were up over 20% in the quarter, so you can see the gap between supply (revenue up 1%) and demand (orders up over 20%). Some orders are still spilling over into the next quarter, but this is likely at a higher rate than usual. The Storage division saw order growth of over 15%, so not as strong as servers, but it was the fourth quarter with such high growth. (Well, by HPE’s historical standards, that’s strong growth.) Storage revenue fell 3.1% in the quarter to $1.16 billion, and operating fell 28.5% to $168 million. During the quarter, nearly 10% of combined compute and storage orders were for products sold AAS rather than acquired directly by customers, according to Neri.
HPE splits its HPC and AI business into a separate division, and it’s primarily Cray supercomputer business with a few NUMA large-memory SGI machines aimed at those markets, as well as dense Apollo server and storage designs, as well as their respective software stacks. Two big HPC deals were pushed back from Q1 to Q2 for revenue recognition — one is almost certainly part of Oak Ridge National Laboratory’s Cray EX “Frontier” supercomputer — and that hurt sales, which fell 21% sequentially to $790 million, but were up 3.7% year on year. The HPC systems business is still choppy, and the AI systems business is no different (and in fact HPE customers sometimes buy the same kind of machines to run these workloads separately, or buy a machine to run them simultaneously). That the HPC & AI division saw its operating profit drop to a loss of $7 million from a gain of $43 million in the year-ago quarter and a gain of $143 in the fourth quarter of fiscal 2021 ended in October. The good news is that HPE’s order growth for its HPC and AI systems increased more than 20% in the first quarter of fiscal 2022, bringing the order backlog for these systems to $2.7 billion. dollars – a record for HPE and Cray.
What we’ve looked at over all these years of change at Hewlett-Packard and then Hewlett Packard Enterprise is the systems core business, and as you can see below the company has made a very good work of construction and maintenance since the Great Recession:
For the January quarter, that core systems business — in this case, Compute, plus HPC & AI plus Storage — had revenue of $4.96 billion, up four-tenths of a point from a quarter. year, with operating profit of $577 million, down 6.9%. . This data has included servers, storage, and networking from the start, but we didn’t have an easy way to extract help desk support from the systems of the old Technology Services group, so it didn’t not include that in the old data. It’s also apples to applesauce that we can do the comparison to show you the overall trend over the last decade and the change.
The thing is, HPE has always been able to keep rebuilding a systems business on roughly the same scope. Which is a feat in itself.
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