For the second quarter in a row, Hewlett-Packard Enterprise chief executive officer Meg Whitman said that one part of the company’s business—which sells servers to major cloud and telecommunications providers—was slammed by lower sales to a “single tier one” customer.
Whitman, again, attributed lower-than-expected server sales to declining orders from a single customer, which she never identified but others have reported is Microsoft. But this time, Whitman said that HPE has to think about whether it even makes sense to stay in that business.
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That’s because, in this arena, HPE (HPE) depends heavily on that one customer. And Whitman expects that customer’s purchases to keep declining over the next few quarters from what is “a pretty big number,” she noted on the company’s second quarter earnings call.
“We’re really thinking hard about what the future strategy is for tier one, ” Whitman said. While HPE is getting new customers in that sector, this is a what she called a “low-calorie business,” meaning HPE has to figure out if it makes sense to continue in it or instead focus on more profitable products like high-end servers and storage.
HPE chief financial officer Tim Stonesifer said HPE revenue from continuing operations was $7.4 billion for the quarter, down 5% year-over-year with some adjustments. Excluding software sales and tier one servers, that revenue would be up 1%, he said.
HPE entered this server segment three years ago via a relationship with Taiwanese contract manufacturer Foxconn, so it’s conceivable it could just shut it down.
The overriding issue here is that companies like Facebook (FB), Microsoft (MSFT), Amazon Web Services, and Google (GOOG) tend to design their own data center hardware while outsourcing manufacturing to low-cost providers.
If software giants are dictating the innovation in hardware, that is a problem for the server makers of the earlier era.
Under previous business models, server buyers simply ordered hundreds or thousands (or more) brand-name servers from the established hardware makers. Many of those corporate customers are now turning to large cloud providers to run more of their workloads. Thus, they don’t need to buy as many servers.
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That shift has stressed legacy server providers—including the old HP (now HPE), IBM (IBM), and Dell—and they had to adjust. IBM sold its X86-based server business to Lenovo. Dell, now Dell Technologies, has its own “white box” or commodity server business to address that market.
Earlier this week, former Microsoft chief executive Steve Ballmer made a remark illustrating hardware makers’ dilemma in the age of cloud computing. One of his mistakes at Microsoft, he said at the Code Conference on Tuesday, was being too slow to get into hardware:“I wish we’d built that. One of the new expressions of software is new hardware.”
Ballmer said he was talking hardware in general, not just mobile devices like smartphones and tablets. “Microsoft Research said all silicon would be in the cloud,” Ballmer continued. “That was a wakeup call for me that we had to be good at hardware.”