A 50-year-old old technology business founded by a onetime political maverick is showing the way to a healthier future for Hewlett Packard Enterprise.
About 38 percent of revenue at the freshly independent HPE comes from its enterprise services operation, the technology outsourcing-and-consulting arm that is the successor to H. Ross Perot’s Electronic Data Systems. (Yes, that H. Ross Perot.) Almost from the moment Hewlett-Packard bought EDS in 2008, the services business has been in near perpetual turnaround mode. There are finally some modest signs of life.
Yes, revenue declines in the services business accelerated in the year ended Oct. 31, falling by 11.6 percent, the company said Tuesday. But some of the decline is from a strong dollar that effectively discounts every sale the company makes abroad. And some of the decline is the result of an intentional effort by CEO Meg Whitman to ditch unpromising customers to improve profits.
Whitman has been blunt about the shortcoming of the services business, which she has said chased bad contracts for too long. The company is letting those deals expire, and margins have improved slowly. Eighteen months ago, the operating earnings margin in the services operation was 2.5 percent. In the most recent quarter, it was 8.2 percent, the best performance since 2011, Whitman said. (The margins haven't yet benefited from the recently announced mass job cuts that largely target the services businesses.)
Whitman has said revenue declines in HPE's services arm should be more modest next year. It says something about the low expectations for HPE that a no-growth services arm with a single-digit operating margin counts as progress. Still, Whitman should get credit for delivering on promised margin improvement in what has been a perennially broken business.
Bolstering sales will be tougher. A legion of companies, including IBM, Accenture, Infosys and Dell are likewise trying to capitalize on shepherding companies through the complex tasks of modernizing their technology and rewiring old company software. And today’s version of corporate tech outsourcing is fewer armies of consultants in suits and ties and more racks of Amazon computer servers.
The e-commerce giant’s pay-by-the-hour cloud-computing business is eating into some of the outsourcing and technology integration work that corporations once paid IBM and EDS to do for them. Amazon’s AWS business pulled in revenue of $5.5 billion through the first nine months of the year, and the business had operating income margin that HPE can't hope to match: 21.5 percent.
Wall Street expectations for her company are crazy low, so Whitman doesn't have to deliver miracles with HPE to make the company a success. Of the 29 analyst recommendations on the company, 24 call for holding or selling the shares, according to Bloomberg data. Overall, the new company forecast profit Tuesday that fell short of analyst expectations for its first quarter since the split from the PC-and-printer HP Inc. Shares of HPE rose anyway, by about 2.6 percent after hours.
The enterprise services business has been like the hopeless home fix-it project in "The Money Pit." For HPE, showing it can keep the roof from leaking is good enough.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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