HPE CEO Whitman: HPE Set To Take Next Step In Transformation With $200M-$300M Cost Takeout

Hewlett Packard Enterprise CEO Meg Whitman Wednesday said the company is set to take the next step in its transformation into a smaller and faster-moving company with a plan to take out as much as $200 million to $300 million in additional costs in the second half of the year.

"We have just gone through one of the largest transformations maybe in American business history, we have created four industry leading companies that I think are poised to do very well in their given segments," said Whitman. "Now we are very focused on the go forward Hewlett Packard Enterprise financial architecture."

[Related: HPE Enhances Entire Storage Portfolio For Flash, Intro's New 3Par 9000 Family]

The closer look at the remaining $28 billion company's financial architecture comes with HPE's successful spin-in merger last month of its $20 billion Enterprise Services business with 110,000 employees moving to DXC Technology; the upcoming spin-in merger this summer of HPE software assets to Micro Focus; and the spin-off of HP Inc. 18 months ago. "We are taking a fresh look at the cost structure for the new HPE," said Whitman. "As a smaller company, it should be much easier to spot opportunities to optimize the business, streamline processes and reduce costs."

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Whitman, HPE CFO Tim Stonesifer, and the top management team are looking closely at the remaining company's cost structure with an eye toward "simplification" and "process reengineering" aimed squarely at making HPE a "much more efficient, leaner" company, said Whitman.

"There is lots we can do here," said Whitman after HPE posted earnings in line with expectations on higher than expected sales. "We are now at a different stage. I can see this very clearly now that ES (Enterprise Services) is gone, software is on its way, and of course, HP Inc. has been on its own for 18 months. We are at that next stage where we can have a major impact in how we can run this company more efficiently and leanly. We are super excited about it. It is going to be a lot of work because whenever you restructure a company, it is a lot of work. But I can see it very clearly."

The $200 million to $300 million in cost savings will be separate from the $700 million in a restructuring charge in the current fiscal year and another $200 million in the fiscal year 2018, said Whitman. "Any incremental cost savings will be funded through the P and L," she said. "There will be no more restructuring dollars."

Stonesifer, for his part, said that with 110,000 fewer employees as a result of the Enterprise Services spin-in to DXC, there are "opportunities" to tighten spending and simplify the structure of the company.

Besides the cost take out, HPE is also looking closely at its Tier 1 service provider sales strategy which is tied heavily to one top public cloud provider. "We are really thinking hard about what the future strategy is for Tier 1," said Whitman. "We continue to get new Tier 1 customers, but this is low-calorie business, actually. 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 our R & D resources into more margin rich, sustainable profitability."

The Enterprise Services spin-in merger with DXC – which remains a strong HPE partner – has accelerated partnerships and sales growth with other system integrators, said Whitman. In fact, the system integrator business alliance sales experienced "strong" growth in the quarter with double-digit growth for certain North America partners, said Whitman.

System integrator sales were up double digits in Asia Pacific, while India-based system integrator sales were up 20 percent year-over-year with strong demand for HPE's Flexible Capacity offering which is aimed at providing public cloud economics for HPE private cloud, said Whitman."We are seeing accelerating demand from other system integrators following the spin of ES," said Whitman.

The Enterprise Services and Micro Focus spin-in mergers are on track to create a whopping $20 billion in value to shareholders and HPE itself based on the current stock prices of the respective companies, said Whitman.

Overall, HPE reported adjusted earnings of $0.35 a share on sales of $9.9 billion for its second fiscal quarter, ended April 30. That met the Wall Street consensus on EPS and beat expectations on expected sales of $9.64 billion. HPE shares were down $0.21 (1.12%) to $18.60 in after-hours trading.

Future HPE revenue, when adjusted for divestitures and without the impact of currency and the Tier 1 server sales decline, would have been up 1 percent compared with the year-ago quarter, according to the company. HPE's core industry standard server business rebounded with sales down 1 percent when adjusted for currency and divestitures.

Among the bright spots for HPE were all-flash storage revenue gains of 33 percent; 32 percent growth in Aruba wireless solutions; 20 percent organic growth in HPE's high-performance computing business, which includes SGI; and the fourth consecutive quarter of growth for HPE Pointnext technology services business, which was up 3 percent.

Dan Molina, CTO of San Diego-based Nth Generation Computing, one of HPE's top enterprise partners, said his company is seeing strong double-digit growth in the HPE business as a result of the transformation of HPE into a hybrid IT intelligent edge market leader.

HPE's new product portfolio – including Aruba's disruptive intelligent edge offering – is resonating with Nth Generation customers, said Molina. "We are using Aruba to help retailers gather intelligence out of mountains of data," he said. "Aruba is providing insights for the business to make better-informed decisions."

Nth Generation is also moving quickly to add the technology offerings from the recent acquisitions of Nimble and SimpliVity, said Molina. "We are very impressed with the Nimble technology," he said. "We are getting our engineers trained." Nth Generation is also working closely with HPE Pointnext to drive a richer set of consulting and advisory services for clients, said Molina.

HPE's transformation under Whitman's leadership has been a remarkable American business story, said Molina. The spin-off of ES and the software business shows that HPE is very focused on delivering the most innovative products in the industry focused on hybrid IT and the intelligent edge," he said. "That is definitely helping us in the field with customers. They like the HPE approach."

Raymond Tuchman, the CEO of Experis Technology Group, a Potomac, Md. HPE partner, said he sees a bright future with a much more sharply focused HPE. He said the new product offerings like Synergy are winning over customers.

"When I go into customer meetings I know I have the best server, storage, and networking products in the business," said Tuchman, noting his HPE business is up 146 percent this year. "Customers that are not talking to us about what HPE is doing with infrastructure innovation are doing their companies a disservice."