Meg Whitman, chief executive officer of Hewlett Packard Enterprise.
Photograph by David Paul Morris — Bloomberg via Getty Images
By Barb Darrow
February 23, 2017

A large mystery customer cast a pall over Hewlett Packard Enterprise’s first quarter earnings on Thursday night.

That’s because HPE’s key storage and server business was dinged by what chief executive Meg Whitman called “lower demand from one customer, a tier one service provider” facing major competition.

For the quarter ending Jan. 31, HPE (hpe) server revenue was $3.1 billion, down 10% from nearly $3.5 billion for the year-ago period. Storage revenue was $730 million, down 12% from $827 million during the comparable period.

HPE’s shares fell 6.37% to $23.09 at one point after the close of regular trading.

That big unnamed customer was referenced several times during the call, and apparently caused a stir, given the number of analysts following up with questions about the topic.

“Service provider” is a term that, in HPE’s case, usually applies to a major cloud computing company like Microsoft, which has long been a big HPE customer. Amazon Web Services and Google, both of which tend to buy white box, unbranded servers, are other large “service providers” in this context. A service provider could also be a large telco.

Related: HP Inc. Can Thank Personal Computers for Lifting Sales

Asked if the customer had slowed purchases because it didn’t need new gear or if it was turning to other name-brand competitors or white box suppliers, Whitman said she only knew that the customer had “dramatically decreased purchasing below their commitments to us.”

She also noted, in response to another question, that large volume deals like this are not as profitable as smaller deals for HPE, because of volume discounts, so any decline impacts revenue more than profit.

While the focus on this customer was jarring, it’s not a complete shock, according to Patrick Moorhead, founder and president of Moor Insights & Strategy, an Austin-based research firm

“Service providers buy in very large increments but it’s also a very lumpy business, so any change in buying behaviors can make a significant impact to a hardware maker’s sales. This is exactly what happened to HPE,” Moorhead said.

Still in a world in which more business customers are turning to public cloud providers like Microsoft and Amazon (amzn) for computing and storage instead of using their own data centers, the buying power of those cloud players becomes more pronounced. So if those cloud giants forego suppliers like HPE, Cisco (csco), Dell Technologies, or IBM (ibm) it’s a big problem for HPE, Cisco, Dell, and IBM. And that does seem to be the trend.

For more on Meg Whitman, watch:

Overall for the quarter, HPE posted adjusted earnings of 45 cents per share on $11.4 billion in revenue. The earnings beat Thomson Reuters consensus estimates of 44 cents but missed on revenue where the analysts had expected $12.07 billion.



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