Antonio Neri: HPE Has Set Up ‘War Rooms’ To Battle Coronavirus Component Shortages

“We have a very stringent process with war rooms and talking to suppliers every single day,” said HPE CEO Antonio Neri. “I personally have talked to at least 50 of them myself and have direct contact with each of them.”

Hewlett Packard Enterprise has established “war rooms” to battle component shortages sparked by the coronavirus with detailed mitigation and recovery plans, said Hewlett Packard Enterprise CEO Antonio Neri.

“We have a very stringent process with war rooms and talking to suppliers every single day,” said Neri in a conference call with Wall Street analysts after HPE reported that “supply constraints” negatively impacted its compute business for its first fiscal quarter, ended Jan. 31. “I personally have talked to at least 50 of them myself and have direct contact with each of them.”

Neri said in general HPE is seeing “progress every single day” in component supply with companies coming back on line or improving manufacturing output.

“Because we have a global supply chain, China is one aspect but it is also how we manage inventory and how we manage the distribution of those orders in a way that we can maximize the return while this thing gets back to normal,” he said.

Neri said the commodity supply constraints disrupted HPE’s ability to meet customer demand for both its compute and high performance compute business. HPE said its compute business was down 15 percent year over year when adjusted for currency. “We had good demand but we couldn’t fulfill it,” said Neri.

In an interview with CRN following the call, Neri said HPE could not get enough SSDs and CPUs to meet customer demand. “That is why we enter Q2 with a higher backlog than we normally would,” he said.

“We have war rooms where our procurement, our planning team, our engineering team – which plays a huge role in qualifying alternatives and making sure we can fulfill demand through different types of usage – so we have as much flexibility as possible,” he said. “This is a very intense process. It is fundamental blocking and tackling, having daily calls with [suppliers] and then having military precision.”

Neri said it is a “long supply chain” to build a server that includes chassis, motherboard, CPU, memory and drives. “The mechanical parts come from China and our suppliers are reliant on other suppliers to give them components,” he said. “They are working themselves with tier two and tier three suppliers, which in general are not just large companies, but smaller companies too. We are trying to get line of sight all the way through that.”

There are also logistics issues that come with shipping components and products, said Neri. “It is not just supply chain but also a logistics challenge that goes with it,” he said. “We will get through this. The question is how long is it going to take.”

HPE sales for the quarter were lower than expected, falling seven percent to $6.9 billion when adjusted for currency. The company reported non-GAAP earnings of 44 cents per share, up five percent from the year-ago period and in line with Wall Street expectations. “It is important to note that even with the revenue shortfall we improved our non-GAAP gross margin by 210 basis points year over year to 33.2 percent,” said Neri.

Because of the component shortage and supply chain issues, HPE is not providing guidance for the current quarter. In addition, HPE said it is revising its free cash flow outlook for fiscal year 2020 to $1.6 billion to $1.8 billion, down from $1.9 billion to $2.1 billion.

HPE is also extending it ambitious Next $1.5 billion cost-savings initiative through fiscal year 2021, with incremental savings expected from the program. Among the steps HPE is taking is a “full cost accounting” review of back-end operations.

Despite the uncertainty, HPE reaffirmed fiscal year 2020 GAAP diluted net EPS outlook of $1.01 to $1.17 and non-GAAP diluted net EPS outlook of $1.78 to $1.94.

HPE shares were down six percent or 73 cents per share in after hours trading to $11.86.

Neri said the overall quarterly results show that HPE’s pivot to an as-a-service model is gaining “momentum,” with GreenLake services orders up 48 percent with 65 new customer logos in the quarter. HPE now has more than 800 GreenLake customers with an annualized revenue run rate up 19 percent to $511 million.

HPE also returned to growth in the intelligent edge business – which includes HPE Aruba – with revenue up four percent year over year and up double digits in North America.

Paul Cohen, vice president of sales for New York-based PKA Technologies, one of HPE's top Platinum partners, said he sees HPE’s stellar product portfolio and pay-per-use strategy resonating with customers.

“We see sales accelerating in the second and third quarter,” he said. “The first quarter for HPE and us is traditionally the softest quarter. However, the product portfolio is by far the strongest in the industry. For example, customers are telling us that Nimble with InfoSight is a storage game-changer.”

PKA expects double-digit HPE product sales growth in the second quarter, with especially strong results in storage, said Cohen. PKA’s Aruba business, meanwhile, was up triple digits last year and is going to be up significantly again this year, he said.

HPE’s channel commitment is key to success, said Cohen. “HPE invests more in their channel program than any other vendor, and they back it up in the field with strong support for partners and resources including marketing,” he said.

On the coronavirus front, PKA is working closely with distribution partners to plan for project roll-outs and is also working with customers to set up home offices if it is necessary.

As for GreenLake, Cohen said he sees the breakthrough pay-per-use model resonating with customers. “We continue to see strong interest in the HPE GreenLake consumption model,” he said. “We are very optimistic about GreenLake customer adoption for this fiscal year.”

Neri, for his part, told CRN that the move to GreenLake is taking hold in the channel, with the sales pipeline up 40 percent quarter over quarter and the number of partners up 100 percent.

“We see very strong momentum with the channel,” he said. “The fact that we have a simple program and enable them to pivot with us and make the right balance of margin while we pivot is the name of the game here.”

Neri said he remains confident in HPE’s strategy and ability to deliver it, working hand-in-hand with partners. “Our customers continue to reaffirm their need for our hybrid capabilities and our advice on their digital transformation and how to harness the power of their data wherever it lives: in the cloud, on- and off-premises, and increasingly at the edge,” he said. “As the edge-to-cloud platform-as-a-service company, HPE is uniquely positioned to capitalize on these trends and help our customers transform.”