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HPE Q2 revenue growth held back by supply constraints

'However, enterprise demand continues to persist across our entire portfolio,' says CEO

Amid a delayed HPC contract and industry-wide supply limitations compounded by the lockdown in Shanghai, Hewlett Packard Enterprise reported year-on-year sales growth of $13 million for its Q2.

That equated to revenue expansion of 1.5 percent to $6.713 billion for the quarter ended 30 April. Wall Street had forecast HPE to generate $6.81 billion in sales for the period and didn't look too kindly on the shortfall.

"This quarter," said CEO and president Antonio Neri, "through a combination of supply constraints, limiting our ability to fulfill orders as well as some areas where we could have executed better, we did not fully translate the strong customer orders into higher revenue growth."

Orders, he said, were up 20 percent on average for the fourth straight quarter – at record levels. And they are of a "high quality, which means the order book is firm. We don't see any major cancellations that will concern us," Neri added.

As examples, HPE said orders for products in its Intelligent Edge portfolio were up 45 percent year-on-year, they grew 23 percent in Compute, and climbed 18 percent in the HPC and AI business unit to $3 billion. This, the CEO claimed, shows the underlying strength of customer demand for technology.

The difficult supply environment was evident in HPE's Q2 results: its largest division, Compute, recorded revenues of $2.985 billion, flat with the year ago period. Despite this, profit before tax edged up to $416 million from $334 million.

The HPC and AI unit grew 5 percent to $710 million and would have been higher were it not for one customer delaying a contract, which will now be realized in HPE's Q3. HPE described the business as "lumpy" but said it has "substantial mega deals" scheduled for H2 of its fiscal 2022. The unit lost $40 million in pre-tax profit compared to a profit of $18 million.

Storage was down more than 3 percent to $1.098 billion, "reflecting supply constraints for our own IP products." This led to an unfavorable revenue mix that pressured margin, with pre-tax profit down to $138 million from $191 million.

Intelligent Edge grew to $867 million from $803 million. Profit before tax was $109 million, down from $126 million. Revenues generated by the Financial Services wing declined $16 million to $823 million but volume increased 2 percent on the back of GreenLake, HPE's as-a-service product.

As for GreenLake, HPE said orders doubled and it added 12 new cloud-native services in the quarter, taking the total to more than 50. The number of resellers/solution providers actively selling it also doubled.

HPE admitted late last year that just 900 of its 80,000-strong global partner network had got behind GreenLake – an area ripe for development.

"Our hybrid cloud offerings have attracted nearly 150 new customers in Q2, including BMW Group, who is using HPE GreenLake to streamline and unify the company's data management across its global locations in the cloud," said Neri. Payment platform Worldline also signed up to implement a major upgrade.

Cisco, Dell, and other enterprise tech bellwethers also recently fielded questions from analysts interested in how the market dynamics are influencing customers' spending. Wall Street is worried about a recession.

"In the short term," Neri said, "we recognize the supply and logistics constraints, rising inflation and evolving economic and geopolitical conditions are all contributing to a dynamic environment. However, enterprise demand continues to persist across our entire portfolio.

"We are focused on translating the demand we see in the market and a high-quality backlog into profitable growth, while continuing to closely manage our inventory position."

On the same conference call, HPE's chief financial officer, Tarek Robbiati, conceded there could be a slowdown on the cards in Europe but said measures will be put in place to counter it.

"European governments are ramping up a number of initiatives that are all in our favor in the digital space, which gives us confidence for the medium to long-term."

Neri said he thinks the "potential slowdown" is going to be "more of a consumer issue than an enterprise issue."

"And the reason why I said that is because every customer we talk to, they are prioritizing digitizing their businesses, modernizing their businesses, deploying cloud as an experience in this multi-cloud approach because it's all about speed and agility."

Also contained within the results was confirmation that the Shanghai lockdowns and the decision to suspend shipments to Russia and Belarus cost HPE $250 million in the quarter.

"The majority of that [financial] impact relates to China," said Robbiati.

HPE has now decided to permanently withdraw from the two nations in protest at Russia's continued aggression in Ukraine and ceased service contracts during Q2.

Cisco warned last month that the lockdown, which has now eased, is going to hurt sales in its current quarter by $131 million to $720 million. Some of the restrictions were removed last week, but thousands still reportedly remain in isolation.

At JP Morgan's recent annual Global Technology, Media and Communications conference, Todd Nightingale, Cisco EVP and GM of the Enterprise Networking and Cloud Group, told attendees about its experience on the ground in China.

"The situation that we saw with these citywide shutdowns, it was so sudden and so complete. The shutdown [is] so complete that finished goods sitting on a loading dock somewhere just can't get out."

This supply situation won't be sorted "for some time," he added. Neri at HPE said he expects constraints to last until 2023. ®

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