Hewlett Packard Enterprise Faces Turbulent Times

(Bloomberg) — Hewlett Packard Enterprise Co. has seen its shares plummet approximately 15% following a disappointing annual profit outlook that has left investors concerned. The tech giant announced plans to eliminate around 3,000 positions as part of a broader strategy to navigate these challenging times.

Profit Outlook Falls Short

In a statement released Thursday, HPE projected earnings, excluding certain items, to be between $1.70 and $1.90 per share for the fiscal year ending in October 2025. This forecast is significantly below analysts’ average estimate of $2.12 per share. The company also anticipates sales for the current quarter, ending in April, to range from $7.2 billion to $7.6 billion, again falling short of the average projection of $7.94 billion.

Challenges in the Server Unit

Chief Executive Officer Antonio Neri attributed the lower profitability to ongoing issues within HPE’s crucial server unit. In an interview, he highlighted that discounting during sales, higher-than-expected costs, and a backlog of older-generation semiconductors are expected to impact profits in the upcoming quarters. Additionally, tariffs are anticipated to further strain the profitability outlook.

Workforce Reduction and Financial Implications

As part of its cost-saving measures, HPE plans to reduce its workforce by approximately 3,000 roles, with 2,500 of these cuts coming from layoffs and the remainder through attrition. As of the end of October, HPE employed around 61,000 people, according to regulatory filings. The company estimates that this workforce reduction will incur costs of about $350 million over the next two years, although it anticipates achieving annual savings of the same amount by fiscal 2027.

AI Demand and Market Dynamics

The rise of artificial intelligence has spurred a surge in demand for powerful servers from hardware manufacturers like HPE, Dell Technologies Inc., and Super Micro Computer Inc. However, this booming business line has proven to be a double-edged sword, as it comes with lower margins due to the necessity of equipping these servers with costly AI chips from companies like Nvidia Corp.

In the fiscal first quarter, which concluded on January 31, HPE reported AI Systems revenue of approximately $900 million, a decline from $1.5 billion in the previous quarter. Despite this drop, quarterly orders for these systems surged to $1.6 billion, indicating a robust demand from enterprises, a customer segment typically expected to yield higher margins.

Quarterly Performance Highlights

HPE’s total quarterly sales rose by 16% to $7.85 billion, surpassing analysts’ average estimate of $7.81 billion. Server revenue reached $4.3 billion, also slightly exceeding expectations. However, adjusted gross margins for the quarter fell nearly 7 percentage points from the previous year to 29.4%, falling short of the anticipated 31.3%. Profit, excluding certain items, was reported at 49 cents per share, just below estimates.

Antitrust Concerns and Future Outlook

In a separate development, the US Justice Department has filed a lawsuit to block HPE’s $14 billion acquisition of Juniper Networks Inc., arguing that the merger could harm competition in the enterprise wireless equipment market. Neri expressed the company’s strong commitment to the transaction, stating that HPE expects to finalize the deal by the end of the fiscal year. A trial date for the antitrust lawsuit has been set for July, as noted in the company’s statement.

As HPE navigates these turbulent waters, the implications of its profit outlook and workforce reduction will be closely monitored by investors and industry analysts alike. For more details, visit the original article here.