HPE Faces Major Setback: Shares Plunge 15% Amid Weak Profit Forecast and Job Cuts

(Bloomberg) — Hewlett Packard Enterprise Co. experienced a significant decline of approximately 15% in its stock value after revealing an annual profit outlook that did not meet investor expectations. The company also announced plans to eliminate around 3,000 positions as part of its restructuring efforts. According to a statement released on Thursday, HPE anticipates earnings, excluding certain items, to be between $1.70 and $1.90 per share for the fiscal year ending in October 2025. This projection falls short of analysts’ average estimate of $2.12 per share.

Weak Profit Outlook and Revenue Projections

For the current quarter ending in April, HPE expects sales to range from $7.2 billion to $7.6 billion, significantly lower than the average projection of $7.94 billion. The decline in profitability is primarily attributed to challenges within HPE’s server unit, as explained by Chief Executive Officer Antonio Neri in a recent interview. Factors such as discounting during sales, higher-than-expected costs, and an accumulation of older-generation semiconductors are expected to negatively impact profits in the upcoming quarters. Additionally, tariffs are anticipated to further strain the profitability outlook.

Workforce Reduction and Financial Implications

To address these challenges, HPE plans to reduce its workforce by approximately 3,000 roles, with 2,500 of these positions being cut and the remainder achieved through attrition. As of the end of October, HPE employed around 61,000 individuals, 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 generated a surge in demand for powerful servers from hardware manufacturers like HPE, Dell Technologies Inc., and Super Micro Computer Inc. However, this business segment has proven to be a double-edged sword, as lower margins are associated with the necessity of equipping these servers with costly AI chips from companies such as Nvidia Corp. and others. 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, quarterly orders for these systems soared to $1.6 billion.

Positive Trends Amidst Challenges

Neri noted a significant increase in orders from enterprises, a customer segment typically expected to yield higher margins. 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% by analysts. Profit, excluding certain items, was reported at 49 cents per share, just below estimates.

Legal Challenges 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 would harm competition in the enterprise wireless equipment market. Neri expressed the company’s strong commitment to the transaction and remains optimistic about closing the deal by the end of the fiscal year. A trial date for the antitrust lawsuit has been scheduled for July, as stated by HPE in its announcement.

As HPE navigates these turbulent waters, the company’s ability to adapt to market demands and overcome operational challenges will be crucial for its future success. For more details, you can read the original article here.