HPE Might Be More Dependent on Microsoft Than We Thought

Jun 01, 2017

Hewlett-Packard Enterprise has said its cloud server business has been slammed two quarters in a row by declining sales to one major customer, which is reported to be Microsoft.

Now, respected Bernstein Research analyst Toni Sacconaghi has done his best to quantify that business.

Microsoft (msft) bought somewhere between $2 billion and $2.5 billion worth of HPE (hpe) servers for all of last year—a number will likely be cut in half in 2017, according to Bernstein Research note released Thursday.

Related: Meg Whitman Says HPE Has to Reconsider This Business

For HPE's second quarter ending April 30, 2017, Sacconaghi thinks that Microsoft accounted for $300 million worth of a total of $450 million of HPE servers sold. Compare that to the year-ago quarter, when he estimates that Microsoft accounted for $600 million of a total $900 million of HPE servers sold. That is quite the fall off.

As HPE chief executive Meg Whitman noted on the earnings call, this customer bought a "big number" of servers, without specifying further. HPE has never named the customer publicly and HPE had no comment on Sacconaghi's report.

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On the call, Whitman said HPE has to re-evaluate this business, where HPE may sell huge numbers of servers but where the profit on such sales is razor thin. That is, in part, because these corporate customers can negotiate volume discounts. Many of those cloud companies, like Amazon Web Services, Google and Microsoft also design and contract out the manufacture of the servers they need to low-cost providers. HPE itself partnered with Taiwanese contract manufacturer Foxconn to build these servers for customers.

Related: HPE Blames One Customer for Server Slowdown

Whitman noted it might make more sense for HPE to get out of this low-margin business at some point to focus instead on more profitable businesses, including high-end servers and storage.

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