HPE Hit By Weakening Networking Demand, Expects It To ‘Persist’ Through Fiscal Year

“Similar to peers in the market, we saw campus networking product demand weaken and the decline late in the quarter was greater than expected,” said HPE CEO Antonio Neri. “This was a large headwind relative to our expectations.”

Hewlett Packard Enterprise is feeling the effects of weakening networking demand which it expects to persist through Fiscal Year 2024.

“Similar to peers in the market, we saw campus networking product demand weaken and the decline late in the quarter was greater than expected,” said HPE CEO Antonio Neri in a conference call with analysts after the company reported lower than expected sales for its first fiscal quarter ended January 31. “This was a large headwind relative to our expectations. Customers are taking longer to digest prior orders than we had anticipated…We expect weakness in the networking maket to persist which is likely to impact revenue through Fiscal Year 2024.”

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The networking market weakness comes just two months after HPE announced its $14 billion proposed blockbuster acquisition of Juniper Networks, which would double its networking business and is aimed at disrupting Cisco in the emerging AI networking market.

HPE’s Intelligent Edge sales, which in the preceding quarter were up 41 percent to $1.4 billion, came in at $1.2 billion for the quarter, up three percent from the year ago period.

“We had six plus quarters of growing between 30 to 40 percent every quarter,” Neri said in an interview with CRN. “Obviously that was huge momentum for us. Now as things normalize in the networking space and obviously there is a little bit of a softness, we are now back to normal levels. But even on that bigger base we grew two percent. That resulted in market share gains across campus and branch. We expect with the combination of Juniper we are going to be even stronger to get even more share in campus and branch and capture bigger share in the data center space.”

The HPE results comes two weeks after networking behemoth Cisco reported a 12 percent decline in networking revenue and announced it was laying off five percent of its workforce or about 4,250 employees in the wake of weak networking sales with customers still digesting orders.

Overall HPE reported first quarter sales of $6.8 billion, down from a Wall Street Zacks consensus of $7.07 billion.

HPE shares were down 58 cents or four percent to $14.65 in after hours trading.

HPE sales were also impacted, said Neri, by the timing of large GPU acceptances from customers. Additionally, he said, potential revenue upside was impacted by tight supply of GPUs.

On the bright side, HPE reported non GAAP diluted earnings of 48 cents per share, three cents above the Zacks consensus of 45 cents per share.

As a result of the revenue shortfall, HPE revised expectations for Fiscal Year 2024 for constant currency revenue and non-GAAP operating profit.

HPE now expects constant currency revenue of zero to two percent, down from two to four percent.

The company expects non GAAP diluted net EPS of $1.82 to $1.92, compared with a prior forecast of $1.82 to $2.02.

HPE also expects full year non GAAP gross margin to be “slightly down” from the prior forecasted 35 percent.

HPE Chief Financial Officer Marie Myers said given the current networking market dynamics, HPE is “taking this moment to streamline and simplify” operations. “We have taken prompt action to further reduce our costs and continue to manage our expenses prudently while we advance our long term strategy,” she said.

HPE GreenLake Fuels 41 Percent Increase In ARR

HPE’s GreenLake cloud service continues to deliver robust sales growth, fueling a 41 percent year-over-year increase in annualized revenue run rate (ARR) for the quarter to $1.4 billion with networking, storage, software and services seeing the fastest growth. That is the second highest year-over-year growth rate since HPE started tracking ARR in late 2018.

HPE’s networking subscriptions through GreenLake were up more than 50 percent compared with the same quarter last year, said Neri.

Furthermore, Neri said that HPE AI revenue through GreenLake is also on the rise. “A lot of the AI revenue actually is now ARR,” he said.

HPE continues to expect ARR growth of 35 to 45 percent going forward, said Neri.

Pat O’Dell, general manager and managing partner for Clinton, N.J.-based CPP Associates, the GreenLake North America Partner of the Year, said CPP continues to see robust GreenLake sales growth. He expects double-digit sales growth in the CPP HPE GreenLake as a service portoflio this year.

“With its edge to core everything as a strategy, I believe HPE has become the fourth cloud,” he said. “We see HPE being brought up in the same conversations as AWS, Azure and Google.”

As for HPE’s acquisition of Juniper Networks, O’Dell said the blockbuster deal will open up more networking and AI solution opportunities for partners.

“This gives HPE a stronger hand in networking,” he said. “It’s like having an Ace in the hole and then drawing another Ace. Aruba is one Ace. Juniper is the second Ace. If you are playing poker you would rather have two Aces than one. Your chances of winning are a lot better.”

CPP is already working on becoming a Juniper partner, said O’Dell. He said he is looking forward to CPP becoming a bigger HPE networking partner with strong growth like CPP has seen with GreenLake.

“Networking is an area where we need to do better,” he said. “We have either been flat or single digit growth in networking. We are really hopeful that the Juniper deal will give us added advantages so we can get that humming like our GreenLake and storage business.”

Neri, for his part, told analysts that although it was a “mixed quarter” given the revenue shortfall he remains more confident than ever in the future ahead.

“I am very confident about the future,” he said. “The moves we have made and continue to make, including the Juniper acquisition, will allow us to participate in this (AI) inflection point with unique IP (intellectual property). Everybody is obviously focused on AI momentum on the server side but you need more than servers. AI will drive the need for more (network) ports. That means you need more networking bandwith. That is for sure!”