Aruba Purchase Gives A Nice Boost To HPE Enterprise Group

  • Hewlett Packard Enterprises recorded the third consecutive quarter of revenue growth in constant currency.
  • The company's networking segment recorded strong growth thanks in part to HPE's merger with Aruba Networks.
  • HPE's networking and converged systems segments appear well-primed for good growth.

Hewlett Packard Enterprises' (NYSE:HPE) Enterprise Group is the company’s most important corporate segment accounting for 53% of revenue and 72% of its operating profits. After many quarters of YoY revenue declines, HPE’s Enterprise Group recorded a 1% Y/Y revenue growth to $7.1B in the latest quarter, thanks mainly to strong growth in networking revenue which was up 54% Y/Y to $852M. The healthy increase is partly attributable to HP’s buyout of Aruba Networks for $3B in May of 2015.

IDC estimates that HP now has a 16.9% share of the enterprise Wi-Fi market, up 70 basis points compared to a year ago. Cisco (NASDAQ:CSCO) remains the most dominant player in this market with 47% of the market. The entire market grew just 5.9% in 2015, and IDC blames this trend on delayed spending by companies as they wait for the full availability of mobile-friendly 802.11ac Wave 2 Wi-Fi systems. HPE now has significant exposure to 802.11ac Wave 2 courtesy of its Aruba purchase. Wave 1 products have been in the market for about three years now and the fact that Wave 2 will offer very significant performance enhancements over its predecessor might allow the iteration to enjoy a longer product cycle. This is likely to keep the company’s networking sales growing at a healthy clip for years to come.

Enterprise Group segment comprises of servers, storage infrastructure (converged infrastructure and traditional storage), technology services, and networking services. Prior to Hewlett Packard Enterprises’ purchase of Aruba Networks, the segment had seen revenue declines for many quarters primarily due to an industry-wide decline in server sales. In this age of cloud computing, server sales have not only been on a free fall for HP but also for other giants like IBM (NYSE:IBM) as web companies including Alphabet Inc-C (NASDAQ:GOOG), Facebook (NASDAQ:FB), and Amazon (NASDAQ:AMZN) prefer to buy server chips from companies such as Intel (NASDAQ:INTC) and then outsource manufacturing off to China and Asia. This trend is not about to go away: during the last quarter, HPE recorded 1% Y/Y decline in server revenue to $3.62B.

Impressive Converged Infrastructure Growth

Hewlett Packard Enterprises’ Converged Systems line is one of the company’s few bright spots. Converged infrastructure is a line of products that combines storage, servers, software, and networking into a single product. During the last quarter, Hewlett Packard Enterprises posted a 3% Y/Y decline in storage revenue to $781M mainly due to a large 15% decline in traditional storage products revenue to $358M. The company’s converged infrastructure sales continued showing healthy growth after climbing 27% Q/Q and 9% Y/Y to $452M. According to IDC, Hewlett Packard Enterprises had a 22.5% converged infrastructure market share during Q3 2015 placing it second in this market. That marked a 300-basis point increase in the company’s market share.

Top 3 Vendors, Worldwide Integrated Systems, Third Quarter of 2015 (Revenues are in Millions)
Vendor 3Q15 Revenue 3Q15 Market Share 3Q14 Revenue 3Q14 Market Share 3Q15/3Q14 Revenue Growth
1. VCE $442.81 27.8% $392.00 24.3% 12.96%
2. HP $357.46 22.5% $314.17 19.5% 13.78%
3. Oracle $339.51 21.3% $313.11 19.4% 8.43%
All Others $451.55 28.4% $594.90 36.8% -24.1%
Total Factory Value $1,591.35 100.0% $1614.18 100.0% -1.41%
Source: IDC Worldwide Converged Systems Tracker, December 21, 2015

From the IDC chart above, it’s quite clear that the three largest players in this market are growing at the expense of their smaller rivals. Particularly encouraging is the fact that HPE’s Converged Systems revenue is growing the fastest which speaks highly about the popularity of the brand.

As long as HPE’s Enterprise Segment is doing well, the rest of the company tends to follow suit. In the latest quarter, Hewlett Packard Enterprises recorded a 3.8% revenue growth in constant currency, the third consecutive quarter of top line growth at the company. Meanwhile, investors are happy about Hewlett Packard Enterprises' recent authorization of a $1.8B stock buyback program. The buyback will be enough to cut Hewlett Packard Enterprises' outstanding shares count by 6%. A buyback of 5% of outstanding shares is considered enough to induce a positive buyback effect. A company buying back large amounts of its own shares is also taken as a vote of confidence in the company’s future business prospects.

Hewlett Packard Enterprises Stock Returns (YTD)

HPE stock chart

Source: Hewlett Packard stock price chart by amigobulls.com

Hewlett Packard Enterprises stock is among the better performers in the tech sector this year, having climbed 16.5% year to date (YTD). Trading at a PE ratio of 13.8 and a price-to-book value of 0.9, Hewlett Packard Enterprises stock appears quite undervalued and could go on to make strong gains as the company’s top line growth keeps improving.

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