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HPE reported F4Q19 earnings yesterday after the close, posting a $0.03 beat vs. our $0.46 EPS estimate. However, broad based weakness on the topline (3% miss vs. our model) and commentary around weak macro as well as pricing pressure into F20 has the stock trading down 10% intraday. Heading into F20, HPE’s NTM setup was tracking positively relative to much of our coverage; strategic business exit impacts had mostly troughed and there was a path to investment harvesting mapping up to incremental revenue. However, yesterday’s results push out at least a quarter a return to positive revenue. We see other names in our coverage that now can inflect the topline at a faster cadence. We remain underperform rated.
We detail our quarterly VAR survey, where we queried 51 value-added storage resellers globally in October for business in July-September. We provide both industry and company level results and walkthrough the stock related takeways.
HPE held its annual investor day yesterday afternoon (10/23/19). Thematically, the company used the day to officially mark the sunsetting of its replatforming phase and look ahead to the plan of steady, profitable growth. AaS pivot underpins this new chapter and the $460mn-$470mn F4Q19 annual run rate was inline with expectations, given prior commentary around Greenlake total contract value ($2.8bn at Discover). Overall we are positive that HPE is taking action to reorient its business model, but also note that transitions are not frictionless; additionally we are taking a cautious approach around the materiality of the change as well as on execution. We see other players in the hardware space with better topline trajectory and more near-term catalysts. Reiterate underperform rating.
And the beats go on…HPE reported a third consecutive beat and raise in F19 yesterday after the close with its F3Q19 earnings. The quarter followed a similar profile to 1H—light on revenue (missed our est by $220mn) but strong outperformance on gross margins (160 bps above our est). There were encouraging signs: 1) macro remains difficult but has not worsened since Discover commentary 2) component costs tailwinds & 3) further execution on focus strategy. However, revenue growth was broadly weak and various double digit YoY growth categories in 2Q fell to single-digit in 3Q. Our recent checks have showed early positive signs for the long-term story, but we still see a material overhang from brand and breadth from larger players as well as an intensifying campus market at the edge. We remain underperform rated.
VARs see overall IT budget spend likely growing, albeit in the low single digits. One reseller mentioned that business had a sudden stepdown entering July. Another touched on global uncertainty; European deals stepped up CIO supervision in 70% of cases, leading to 20% uptick in sales cycle length. Overall, VARs recognize that 2018 provides a tough compare for enterprise spending, potentially exacerbated by recent signals of weakness, but they continue to see IT capture a larger share of overall corporate budgets.
We surveyed 50 value-added resellers of storage in the US, Europe, and APAC. The survey was taken in July, asking about April-June business though we may have picked up some July views. Takeaways include (1) the outlook for overall IT spending in 2019 improved over last quarter; (2) storage spending stepped down sequentially with nearly 75% reporting fair/ok sales strength; (3) NTAP’s outlook worsened vs. the prior period, while DELL sales and outlook remained steady (4) discounting ticked down across our coverage with DELL & PSTG seeing the largest changes.
John Treadway has worked with large enterprises considering both private and public cloud implementations, first at Cloud Technology Partners, which was acquired by HPE, and now at Symphony Solutions, where he is CEO. Although hyperscaler revenue growth is moderating, he argues it is mostly due to tough comparisons as cloud approaches $70bn of revenue. He says AWS’s Andy Jassy might be right that only 3% of workloads are in the cloud by dollars.
In addition to tracking the five major tech sectors—Hardware, Semis, Software, Internet, and Services—we have added 2-3 subsectors for each for greater granularity. We show their performance in our weekly Wolfebytes.
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