Hewlett Packard Enterprise's joint venture with Foxconn to build lower cost servers to order for the world's biggest service providers is under threat because of its over reliance on shrinking sales to its one major customer, reportedly Microsoft.
The two-year-old tie-up between the pair was created to compete with Chinese original design manufacturers, companies that have continued to grow fat by winning orders from customers Facebook, Google and Rackspace - companies that were on HPE's wooing list.
But for the second quarter in a row, HPE server sales have slipped. CEO Meg Whitman attributed this to a single "tier-one" service provider not spending as heavily as it had in the past – believed to be Microsoft.
"We are heavily dependent on one customer," Whitman said of the joint venture. She claimed that purchases from that single entity – who was not named – will continue to decline for the next couple of quarters.
Back in December 2015, HPE made Microsoft its favoured vendor for public cloud and in turn Microsoft vowed to use HPE kit when it built out its data centre estate.
Whitman didn't explain why the tier-one customer was buying fewer systems, and it is not yet clear if Microsoft has turned to a rival, but the trend has caused HPE to enter review mode.
"We're thinking hard about what the future strategy is for tier one," said Whitman. "We continue to get new tier customers, but this is low calorie business actually and so we need to think through does it make sense to continue that business on a go-forward basis or are we better off actually putting our selling resources and R&D against more margin-rich sustainable profitability?
"The strategic question is, is this a business we really want to be in because we're not in the business for share, for share's sake. We're in it to get a return on our investment dollars and right now that doesn't look like a particularly productive segment for us".
In Q2 of HPE's fiscal 2017 ended 30 April, server sales declined 14 per cent year-on-year to $2.99bn. The company said its "core" server business declined 1 per cent. In Q1, server sales slid 12 per cent to $3.1bn.
According to Sanford Bernstein analyst Tony Sacconaghi, HPE sold $2bn to $2.5bn worth of servers to Microsoft in its fical 2016.
But in Q1 and Q2, server sales to Microsoft had slipped to $450m and $300m respectively, indicating that the run rate business could be up to 50 per cent lower than a year ago.
"We note that server sales to Microsoft likely have negative operating margin, though we suspect they contribute positively, meaning that any further loss of revenues to Microsoft could necessitate offsetting cost cuts to maintain margins," Sacconaghi said.
HPE and Microsoft had not responded to a call for comment at the time of publication. ®