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Behind HPE’s $1B cost savings plan

Behind HPE’s $1B cost savings plan

The plan is aimed at focusing HPE’s investments and “realign” its workforce to areas of growth

Antonio Neri (HPE)

Antonio Neri (HPE)

Credit: HPE

Changes to Hewlett Packard Enterprise’s (HPE) product portfolio strategy, go-to-market configurations, supply chain structures and more are on the cards after the vendor decided to embark on a US$1 billion cost savings plan.

On 21 May, along with its second quarter financials, HPE announced that its board of directors had approved a cost optimisation and prioritisation plan to prioritise investments and “realign” resources to areas of growth.

Specifically, the plan is aimed at focusing HPE’s investments and “realign” its workforce to areas of growth. This includes, according to HPE, “measures to simplify and evolve its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model and marketing experiences, and real estate strategies”. 

HPE said it expects that the plan will be implemented through to fiscal year 2022 and estimates it will include gross savings as a result of changes to the company’s workforce, real estate model and business process improvements of at least US$1 billion, compared to fiscal year 2019. 

Overall, the plan is expected to deliver annualised net run-rate savings of at least US$800 million by the end of its fiscal year 2022, also relative to HPE’s fiscal year 2019. 

HPE also said that, in order to achieve the proposed level of cost savings, it estimates cash funding payments between US$1 billion to US$1.3 billion over the next three years.

The decision to implement the cost saving plan came after the company, on April 6, filed a notice to withdraw its fiscal year 2020 financial guidance, due to the increased level of uncertainty in which the global COVID-19 pandemic may adversely impact its business operations, financial performance and results of operations. 

As such, the company said it will not be providing fiscal year 2020 third quarter or full year guidance.

“The global economic lockdowns since February significantly impacted our fiscal Q2 financial performance,” HPE president and CEO Antonio Neri said. “We exited Q2 with US$1.5 billion dollars in orders across the portfolio, representing two times the average historical backlog.”

“Despite challenging circumstances, HPE GreenLake, our as-a-service offering, gained traction with 17 per cent ARR [annual recurring revenue] growth and our Intelligent Edge business grew 12 per cent in North America outperforming the market while expanding margins.

“We are taking decisive steps to navigate the near term uncertainty, while ensuring we align resources to priority growth areas so that we are well positioned to accelerate our edge-to-cloud strategy and address the needs of our customers in a post-COVID-19 world,” he added. 

Despite the gains noted by Neri, some areas of HPE’s business didn’t fare so well during the three months ending April 30. 

For example, Intelligent Edge revenue came in at US$665 million, down 2 per cent year-over-year when adjusted for currency, with 11.0 per cent operating profit margin, compared to 5.3 per cent from the prior-year period. 

Compute revenue, meanwhile, was down by 19 per cent, year-on-year, when adjusted for currency, to US$2.6 billion, with 4.7 per cent operating profit margin, compared to 9.3 per cent from the prior-year period. 

“Revenue in the quarter was pressured primarily by component shortages and supply chain disruptions related to the COVID-19 pandemic that impacted our ability to fulfill customer demand,” HPE said. 

At the same time, High Performance Compute and Mission Critical Systems (HPC and MCS) revenue was US$589 million, down 18 per cent year over year when adjusted for currency, with 5.6 per cent operating profit margin, compared to 12.8 per cent from the prior-year period. 

Again, revenue was impacted by COVID-19-related delays in installations and customer acceptance, resulting in an elevated backlog that should flow into the second half of the year. 

“Our HPC business has been actively involved in COVID-19-related research activity and is providing COVID-19 researchers worldwide with access to the world’s most powerful HPC resources to advance the pace of scientific discovery in the fight to stop the virus,” HPE said. 

Meanwhile, storage revenue was US$1.1 billion, down 16 per cent year-over-year when adjusted for currency. According to HPE, revenue in the quarter was pressured primarily by component shortages and supply chain disruptions related to the COVID-19 pandemic that impacted its ability to fulfill customer demand. 

The company’s Advisory and Professional Services (A&PS) revenue was US$237 million, down 8 per cent year-on-year when adjusted for currency, with 0.8 per cent operating profit margin, compared to (5.4 per cent) from the prior-year period.

Likewise, Financial Services revenue was down by 5 per cent, year-on-year, to US$833 million, when adjusted for currency, with 9.0 per cent operating profit margin, compared to 8.6 per cent from the prior-year period.

Big Data was a bright spot, however, and showed continued momentum, up 61 per cent year over year when adjusted for currency, while Nimble Services revenue grew 20 per cent, year-over-year, with services intensity at record highs as customers added high-margin value-added services.

Overall, the company’s net revenue was down, year-on-year by 16 per cent to US$6.0 billion, driven primarily by supply chain constraints and delays in customer acceptance, which resulted in significantly higher levels of backlog, particularly in Compute, HPC and MCS, and Storage.

The company’s gross profit margin, under Generally Accepted Accounting Principles (GAAP), was also slightly down, to 31.9 per cent, compared to 32.2 per cent from the same period the prior year. Although GAAP operating profit margin was up to 13.9 per cent, from 6.1 per cent the prior year.

It is against this backdrop, which features so heavily year-on-year revenue falls for the period, that HPE is taking what it refers to as “immediate actions to reduce operating expenses”.

In addition to the company-wide cost savings measures being implemented, HPE has also approved certain base salary adjustments for the period beginning on July 1, 2020 through the remainder of fiscal year 2020, with the base salaries of the company’s CEO, and of each executive officer at the executive vice president level, to be reduced by 25 per cent, and the base salary of each executive officer at the senior vice president level to be reduced by 20 per cent.


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