HPE revenues rose just one per cent in its third fiscal 2021 quarter, ended July 31, with supply constraints hitting server ships, but underlying overall order growth promised well for the future.
Revenues of $6.9 billion were close to the year-ago $6.82 billion, but profit was impressively higher: $392 million vs $9 million a year ago.
HPE CEO and President Antonio Neri put a bright and shining face on the quarter: “We delivered a very impressive Q3 performance, marked by strong order growth, expanded margins and record free cash flow. I am pleased to see how our differentiated portfolio is resonating with the market, and our edge-to-cloud strategy is driving improved momentum across our businesses.”
Neri was impressed by order growth, saying there was strengthening demand, up strong double-digits from the prior-year period and year-to-date up 11 per cent from the prior-year period. The subscription shift is progressing well, with the annualised revenue run-rate (ARR) reaching $705 million, up 33 per cent from the prior-year period. HPE as-a-service orders were up 46 per cent year-on-year. Orders are not being cancelled due to supply constraint-caused delivery delays.
Robbiati doesn’t see the supply constraints “ending before the first half of calendar year ’22. So, we just have to navigate this as the capacity of all our manufacturing partners is not back to pre-pandemic levels and that will still take a good two to three quarters.”
Financial summary:
- Gross margin — 34.5 per cent, up 420 basis points from a year ago;
- Diluted EPS — $0.29 vs $0.01 a year ago;
- Cash flow from operations — $1.13 billion, down $342 million from a year ago
- Free cash flow — $526 million, down $398 million on the year.
The results were good enough for EVP and CFO Tarek Robbiati to lift the outlook: “We are once again raising our full-year guidance to reflect the continued momentum in the demand environment and our strong execution. This marks the fourth increase in our outlook since our Securities Analyst Meeting in October 2020.”
HPE is also resuming stock repurchases.
Segment results
HPE’s core compute segment brought in $3.1 billion, which was nine per cent less than the year ago’s $3.4 billion. That $300 million difference depressed overall revenues, causing the lethargic one per cent overall growth rate.
The Intelligent Edge segment (switching, WLAN, Aruba SaaS) was truly impressive, featuring 27 per cent year-on-year growth to $867 million. High Performance Computing and Mission-Critical Systems revenues rose 11 per cent to $741 million and Storage also followed this upwards pattern with four per cent growth to $1.2 billion. This was the second successive quarter of storage growth.
The storage growth was better than Dell’s one per cent decline, but not quite as good as NetApp’s 12 per cent rise or Pure’s 23 per cent jump.
There was strength in Nimble, up ten per cent from the prior-year period when adjusted for currency, with strong momentum in dHCI growing double-digits.
All-flash Arrays (AFA) grew over 30 per cent from the prior-year period led by Primera, up mid double-digits from the prior-year period. This was the fifth consecutive quarter of year-on-year AFA revenue growth and compares to +20 per cent growth in the previous quarter.
What went wrong with servers? And with cash flow?
The earnings call had the CFO saying: ”In compute, revenue grew four per cent quarter-over-quarter, reflecting normal sequential seasonality despite previously anticipated supply chain tightness. Operating margins of 11.2 per cent were up 190 basis points from the prior year due to disciplined pricing and the right-sizing of the cost structure in this segment.”
Robbiati said this about cash flow: “First of all, we have to continue to make investments in our inventory level to withstand the supply chain constraints that we flagged for several quarters now. Second, in Q4 of fiscal year ’21, … I described a very, very large GreenLake deal that will impact free cash flow in Q4, but that will generate substantial ARR revenue in subsequent quarters.
“This is a deal in several hundred millions of dollars that we have not announced yet, but it is already something that we are financing, and this is affecting, therefore, free cash flow already as of Q4 of fiscal year ’21. Thirdly, we are still peaking on restructuring cost in fiscal year ’21 and we feel very positive about our cost optimisation and resource allocation program, which will wind down at the end of fiscal year ’22.”
Turning to servers he said units were flat quarter over quarter reflecting supply constraints but also prices were up: “AUP (Average Unit Price) was up mid to high single digits quarter-on-quarter, reflecting pass-through of commodity cost and richer configurations.”
He said this “is translating in this record level of gross margin at 34.7 per cent. Some of our competitors didn’t take that action and it’s down to them and up to them.”
Reading between the lines HPE could have discounted to sell more servers but the supply constraints would work against that tactic, so, with demand strong, HPE stood firm on pricing.
Wells Fargo analyst Aaron Rakers told subscribers: “While we expect some investors to question HPE’s relative Compute performance vs Dell reporting +6 per cent year-on-year growth for Servers and Networking in the July quarter, the company would emphasise a tough compare amid a backlog burn-off post-COVID in the year ago quarter.”
Order book and outlook
In general: “The order book is very, very solid. Antonio underscored this, across the board, our order book is super solid.” Specifically for storage: “Our growth in Storage, which comes with very high-calorie gross margin revenue, is pleasing at three per cent. We took share from some of our main competitors.”
Nimble and Primera have already been mentioned but there was no mention of progress with the recently-announced Alletra arrays.
HPE expects its revenues to continue to grow but didn’t provide a revenue number outlook for the, fourth, quarter or for the full year
HPE strategy and acceleration
Neri is convinced HPE has the right strategy for the market: “I think our edge-to-cloud vision and strategy is absolutely resonating in the market, because customers need three things: they need secure connectivity in this hybrid world; they need a cloud experience everywhere; and then they need data insights yesterday, in my view; and then they need to be able to consume it as-a-service in an elastic way. We have all the four ingredients and that’s why we are going to accelerate further and faster this strategy because it’s working.”
Neri said: “I am proud of HPE’s performance in Q3 and year-to-date, and the significant progress we have made in becoming the edge-to-cloud company. The momentum we have in the market compel us to move even further and faster, and our ability to transform with increasing speed is imperative. This transformation is my number one priority.”
He added: “This is all about acceleration … and between now and March, you’re going to see a massive acceleration and that’s why it’s my number one priority.” His execs better get used to demands for faster progress.
