HP EMEA Strategy Balances The Challenges Of New And Old

HP EMEA Highlights

• Overall revenues dropped 7% to €8 Billion
• Led the server, second in enterprise network and third in storage system markets in 2012
• At a product and country level the decline in old revenue is deeper than the growth in new for now
• Has 4 specific ‘spend to save’ schemes in server, storage and network areas
• Looks for new customers with its ARM-based project Moonshot servers
• Takes a technology innovation – rather than business workload approach

HP keeps in touch with analysts well in our region. Having covered his overview with you last quarter we again listened to and asked questions of Peter Ryan – head of the Enterprise Group and MD of EMEA recently. You’ll be interested to read an update on the companies’ successes and challenges in EMEA.

HP Faces The Challenges Of EMEA

As usual Peter ran through the highlights of the quarter, concentrating this time on a number of challenges and a few opportunities. In particular:

• Public sector is usually quite strong in the region, but austerity budgets have delayed a number of projects
• Finance – many banks are in the process of working out which technologies to invest in and how much
• In Southern Europe Spain Portugal and Italy are challenging
• France – despite the challenging economy The Enterprise Group has done well
• Germany – the SAP HANA developments are promising for the future, but not expected to create much business in the near term
• Middle East and Africa – growing, but from a small base; political instability is slowing the business down in some countries
• In Russia there have been a lot of changes in senior IT personnel in the largest spending companies, creating instability
• Kazakhstan is still a gang-buster country; HP has business with the nation railway, telecom and bank and is helping the country leapfrog in technology to attract investment from outside; its business includes Cloud and Technical Service contracts
• In Eastern Europe the most Western country markets are looking more like traditional Western European ones

Q4 2012 was not a great quarter for HP – overall revenues declined 11% to $10.4 billion (according to our ‘calendarisation’), although currency affects meant that was only -7% (€8.0 billion). Peter noted currency changes between the US Dollar, Euro and British Pound had been ‘pretty bumpy’. The 3 customer references were a global clothing manufacturer, a European public sector account in Belgium and a major Telecom company all buying multiple Enterprise Group offerings, but also unnamed this time around. We show our estimates for the Enterprise Group’s revenues by offering in Figure 1.

HP Networking Growth

HP grew its worldwide revenues from Networking by 6% to $608 million in the first quarter, which included a 56% growth in HP router units shipped. We place it in second position in the Enterprise/Consumer networking market in 2012 in EMEA (see Figure 2), however with 6.7% share it’s a long way behind Cisco who led with 53.9% (see Figure 2). Peter believes HP is disruptive in the networking market – illustrated by its FlexNetwork Utility Advantage Program, which allows enterprises to buy pay-per-use managed network offerings from Telecom Service Providers.
It also has a heterogeneous approach to network management in its Software Defined Data Center approach with its StoreVirtual VSA offering, allowing users to manage Cisco, Huawei and Juniper equipment alongside its own.

Storage Systems Transition Issues

HP is going through a transition in its storage systems business, moving its customers from its ‘legacy’ EVA and (Hitachi-sourced) XP arrays over the its 3Par-based offerings. So although at a worldwide level in FY12 it posed year on year revenue growth of 76% for ‘Converged Storage’[1], 75% for 3Par StoreServ and 45% for StorOnce, storage was down 13% in Q1, with ‘converged’ growing 18% to $242 and ‘traditional’ down 21% at $591. Peter noted that HDS is lowering price points on its own mainframe storage offerings. We show HP’s calendar 2012 external storage market share in Figure 2.

‘Spend To Grow’ Initiatives

We asked Peter about HP’s ‘spend to save’ initiatives in the region. He pointed to 4 specific activities. In particular:

• It has launched a ‘refresh for less’ programme for its x86 Proliant Generation 8 servers, turning Cap Ex into Op Ex payments through HP Financial Services which ‘pays back in under 6 months’
• For 3Par storage it has the ‘get thin guarantee’ which promises users a 50% reduction in capacity, floor space and energy needed for storage, along with a time saving of up to 90% for administration and the elimination of SAN equipment
• Also in the 3Par storage business it offers a ‘get virtual guarantee’ where it promises to double the number of VMs on existing severs, increase storage consolidation and utilisation rates by 2 and eliminate the storage bottlenecks that limit virtualisation performance
• Its FlexNetwork Utility Advantage Program (see above), which allows enterprises to their spending from Cap Ex to Op Ex

He noted that lots of companies are being forced to invest in IT infrastructures. HP’s 3Par approach allows users to keep their old equipment if they want: HP Financial Services’ involvement also offers the possibility of selling it back to free up the budget. Peter also noted that HP continues to work with IT Services companies such as Accenture, Cap Gemini and Atos Origin. We think it lacks the business approach taken by a number of its competitors, who unlock ‘spend to save’ revenues by talking to business – rather than technology – leaders.

Project Moonshot Will Open Up New Customers

Project Moonshot is on the point of becoming a revenue generator for HP. It involves putting low-energy processors in hyperscale configurations – the ‘first software defined server’ uses Intel Atom chips. Peter claims that this ‘Gemini’ second-generation platform will reduce energy usage by 89%, take 94% less space at 63% less cost and 97% less complexity when compared to x86-based systems. He sees this as a way of opening up sales to Service Providers and hosters who want to provide their customers with physical and/or virtual servers. It should also allow it to sell servers to large public Cloud providers, who have tended to build their own ‘white box’ machines.
We’re less bullish than HP on the opportunities for ARM-based servers, especially in EMEA where there are few big public cloud providers – less a revolution in the data centre, more a niche market for now.

Some Conclusions – HP Bets On Technology Innovation

Meg’s turnaround of HP has resulted in some improvement in the share price and an increase in cash flow from operations to $2.6 billion in the quarter, despite the huge ‘goodwill impairment’ costs associated with the misplanned acquisition of Automony.
Peter is a salesman with 33 years experience in our industry. His region is going through hard times as a result of the Credit Crunch and government austerity budgets. Its investments in 3Par and 3Com mean that its building new products with its own IP to replace staple revenue streams from traditional products, but is experiencing disruption as the promise of ‘the new’ struggles to overcome the decline of ‘the old’. The same is true of the country markets – declines in Western Europe have been deeper than the gains from new countries such as Kazakhstan.
Its challenges are very similar to Dell’s, although much of the older offerings were based on HP’s own IP rather than OEM and reseller equipment from other suppliers and HP understandably spends more time on integration than Dell, which is comparatively new as a systems supplier with its own IP. We note that its transformation remains locked to technical innovation rather than the workload and Smarter Cities approach taken by IBM: as a result we think it will find it harder to unlock ‘spend to save’ revenues from large public and Enterprise accounts, which typically start as a business rather than data centre initiative.