Hewlett Packard Enterprise Co. (HPE) showed off new energy and unity at its coming-out party in London last week at HPE Discover Europe 2015. The clear message was this is not the old HP, which was an organization composed of silos that seldom talked to each other and at times went in different, even diametrically opposed directions. The new HPE is unified and focused on delivering not just technical excellence but business results, company executives said on theCUBE during three days of intense coverage.
The executives spoke with particular enthusiasm about Synergy, HPE’s new “composable infrastructure” software under development that, they say, will turn customer data centers into unified pools of resources that can be assigned via software, providing flexibility similar to that of Amazon Web Services (AWS). Developers will be able to get the resources they need to run the applications they develop in a few minutes and with a couple of lines of code rather than having to queue up waiting for IT operations. And Synergy will greatly simplify IT by automating many manual, such as optimizing hardware for specific compute loads.
Essentially, Synergy will virtualize whole data centers, servers and storage, and unify the old IT architecture of Systems of Record with the new one of microservices, HP said. Whether it will only work on HPE hardware or will include hardware from other vendors is unclear.
HPE is also making money, a lot of it, according to the HPE executives. Two storage executives told theCUBE on Wednesday that HP’s all-flash arrays are flying out the door. Server-side execs said sales of HPE’s core products are strong as well. The company still leads the enterprise market in total server sales, according to International Data Corp., and it is making inroads into the new cloud and hyper-scale markets. Microsoft Azure is a particularly large customer.
Huge revenue, small margin
Executive messaging was intended to create an image of a strong vendor moving confidently and generating huge revenues. What the executives didn’t discuss was overall margins, however, particularly for HPE’s core hardware. HP has a history of prioritizing revenues over margins. But traditional hardware markets are seeing a “slow collapse” of margins, in the words of Wikibon Analyst George Gilbert, driven by open source and the move to cloud hyper-scale providers such as AWS that either make their own hardware or buy from Asian white box manufacturers.
HPE’s traditional markets have become price sensitive and margin challenged, making its success a good-news/bad-news scenario. For exmaple, HPE overall is holding on to its second-place status in disk storage arrays, but market has shrunk 31 percent in the last year, according to IDC. Its flash business is growing rapidly, but flash storage prices are dropping to commodity levels. The result is that HPE is slowly moving toward a modest corporate goal of a nine percent net profit margin, said Wikibon Chief Analyst and SiliconAngle Media Co-CEO David Vellante on theCUBE.
HPE also has problems with its large services group. While competitors such as Deloitte, Accenture and IBM realize double digit margins with their services organizations, HPE consulting is focused tightly on hardware support, where the margins are also under pressure. HP needs to refocus on higher-level business problems to improve that business.
A company in the balance
But the new HPE has some things going for it, too. CEO Meg Whitman carefully structured the separation of HPE from HP Inc. so that the considerable corporate debt left over from her predecessors, which had been an anchor to the corporation, went with HP Inc., Vellante noted. This leaves HPE free to acquire promising startups that can potentially bring higher margins and new lines of business. The Aruba acquisition, which brings it advance wireless networking that will only grow in importance over the decade and will be a strong leader for HPE to enter new markets, is an excellent start.
HPE also needs to focus more on software, where margins are in the double digits, Vellantee said. It can be done. IBM successfully moved away from its reliance on hardware to become a more diversified software and services provider during the last decade. HPE will have to deal with considerable anti-change friction from veteran executives who don’t like the idea of playing second fiddle to a software organization. One reason IBM’s sale of its x86 server business last year worked so well was that most of its hardware executives went to Lenovo Group Ltd. as part of the deal.
Synergy sounds promising, but its success depends upon new hardware, and in particular Memristor, HPE’s much-heralded next-generation persistent memory technology, Vellante said. It represents an architecture that is the first instantiation of The Machine, its next-generation server. HPE is promising to introduce those technologies to the market in early 2017.
Another issue is changing compensation plans for both the internal sales organization and partners to tie rewards to solving problems rather than moving high volumes of hardware. Most sellers in the HPE ecosystem are still focused on “moving tin,” Vellante said.
Like the other large vendors, HPE is also eyeing opportunities in the Internet of Things (IoT). It has repackaged its unique Moonshot “data center in a box” architecture to bring compute power to the edge of the network to process large data volumes at their source and only send significant data onto the network. This is strong technology, Vellante said, but it’s still hardware-focused. The real money, analysts agree, will be in data analysis software and services.
So despite all the positive energy at Discover Europe, HPE faces significant challenges. On the one hand it can start transforming itself into a company that is focused higher up the IT stack, with software rather than hardware leading its strategy. Or it can transform into a commodity hardware company where efficiency rules. It could survive with the latter strategy, but wouldn’t have the resources to support large amounts of R & D or capital to make large numbers of acquisitions.
Vellante does not see the future as bleak. On the third day of HPE Discover Europe he said big vendors such as Dell-EMC, HPE, IBM and others can coexist and prosper despite their very different strategies (see video below). It’s a big market.