HPE Enterprise Services transformation returns significant margin

Hewlett Packard Enterprise officeHPE Services profitability continues to expand following cost reduction initiatives, despite ongoing revenue declines, says Kevin Collupy, analyst at TBR.

HPE Enterprise Services transformation returns significant margin improvements while Technology Services gains momentum with customer wins and increased focus.

Hewlett Packard Enterprise (HPE) Services, currently comprised of Enterprise Services and Technology Services (TS), remains on track with the internal transformation. Revenue declines are slowing while commoditization of legacy services continues. HPE has a prioritized focus and is building flexibility following the announced plans to spin off its Enterprise Services segment and the “spin-merge” of its noncore software assets. These moves return HPE to its technology roots, an area where HPE’s TS, the remaining services arm, has core strengths that deliver high margin revenues.

Hewlett Packard Enterprise

Fourth quarter revenue of $12.5 billion (–7 percent)
Fiscal 2016 revenue of $50.1 billion (–4 percent)

Fiscal 2016 Q4 results

Enterprise Group $6.7 billion (–9 percent)
Servers (– 7 percent)
Storage (–5 percent)
Networking (–34 percent)
Technology Services (–4 percent)

Enterprise Services $4.7 billion (–6 percent)
Infrastructure Technology Outsourcing (–7 percent)
Application and Business Services (–3 percent)

Software revenue $903 million (–6 percent)
License revenue (–5 percent)
Support (–7 percent)
Professional services (–7 percent)
Software-as-a-service (SaaS) (–1 percent)

HPE Services reported revenue of $6.5 billion for CY2Q16 (FY4Q16), down 5.2 percent year-to-year. HPE Enterprise Services revenues fell 5.7 percent year-to-year, however the operating margin improved 240 basis points to 10.7 percent year-to-year, well exceeding its previous goal range of 6 percent to 7 percent. TBR believes the cumulative results conclude that reductions in delivery costs and low-value account runoff are positively impacting HPE Services bottom line.

Security investments enhance HPE’s position to capture digital transformation engagements

HPE announced the spin-merge of its non-core software assets with Micro Focus during 2017 to concentrate on its remaining technology assets. TBR believes the spin-merge combined with HPE’s recent divestitures of its other security assets, such as TippingPoint, enables HPE to change the approach to security.

When HPE sold its TippingPoint network security unit to Trend Micro during 2015, HPE indicated it would use the proceeds to enhance its remaining security solutions, with a focus on ArcSight, its security information and event management (SIEM) solution. We expect ArcSight may also be moved to Micro Focus in the planned spin-merger. Whether ARcSight is retained or removed from the HPE portfolio, it can still create opportunities for HPE Services to deploy its SIEM solution across a multitude of clients improving security operations by integrating information and controls throughout the security operations.

The acquisition of SGI and internal investments including the launches of HPE Managed Security Services, HPE ArcSight Data Platform, HPE Fortify Ecosystem, Fortify on Demand and HPE SecureData display HPE’s efforts on expanding its capabilities within managed security services. TBR expects that expanding HPE’s ability to provide managed security services especially for digital transformation will help differentiate in area that is becoming increasingly crowded.

Investing in horizontally adaptable analytics enable HPE to create a value proposition

According to TBR’s 1Q16 Analytics & Insights Professional Services Vendor Benchmark, vendors leverage acquisitions to develop analytics capabilities quickly as well as increase R&D efforts to expand portfolio capabilities. This strategy aligns with HPE’s recent moves, acquiring SGI which strengthens its high-performance computing portfolio as well as data management and analytics capabilities. During 2016 HPE also focused on developing analytics capabilities internally, launching several new analytics services including HPE Universal IoT Platform and HPE Vertica 8 which enhance data analytics and predictive analysis capabilities.

TBR believes that HPE will continue to invest in boosting its analytics capabilities into 2017, ahead of its large divestments of both non-core software and Enterprise Services businesses. Future investment are expected to improve analytics and big data capabilities that are close-to-the-box and at the edge computing. Developing horizontal analytics solutions adaptable to various industries and packaged with HPE’s infrastructure would position the company to better compete against competitors such as IBM and Accenture.

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