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HPE on three year cut plan after supply chain problems

Hewlett Packard Enterprise (HPE) has embarked on a three-year cost-cutting programme after posting a disastrous set of results for the second quarter ended 30 April. The results were affected by supply chains being hit and deployments being delayed as a result of the ongoing pandemic. The company hasn't so far announced any job losses as a result of its plans. HPE will not be providing any fiscal year 2020 third quarter or full year financial guidance.

For the second quarter, revenue was $6bn - down 16% from the same quarter last year. There were “significantly higher levels of backlog”, particularly in the Compute, High Performance Compute & Mission Critical Systems, and Storage segments, said HPE.

To illustrate the problems, for the same quarter last year, the company posted a $434m operating profit. This time it disclosed a $834m operating loss.

“The global economic lockdowns since February significantly impacted our fiscal Q2 financial performance,” said Antonio Neri, president and CEO of HPE. “We exited Q2 with $1.5bn in orders across the portfolio, representing two times the average historical backlog.”

This backlog represents the price of firm orders related to the second quarter and prior quarters for which work has not been performed or goods have not been delivered as of 30 April.

“Despite challenging circumstances,” said Neri, “HPE GreenLake, our as-a-service offering, gained traction with 17% ARR growth and our Intelligent Edge business grew 12% in North America - outperforming the market while expanding margins.”

He added: “We are taking decisive steps to navigate the near term uncertainty, while ensuring we align resources to priority growth areas, so that we are well positioned to accelerate our edge-to-cloud strategy and address the needs of our customers in a post-Covid-19 world.”

In response to that uncertainty, HPE has reduced senior salaries for the remainder of the financial year. Base salaries for the CEO and all executive vice presidents will be reduced by 25%, and the base salaries of all senior vice presidents will be reduced by 20%. The company will also reduce by 25% the portion of the annual $100,000 cash retainer to which each director is entitled to, for the period beginning on 1 July until the end of fiscal 2020.

And HPE is bringing in a “cost optimisation and prioritisation plan” in order to re-focus HPE’s investments and “realign the workforce” to areas of growth. This includes measures to “simplify and evolve” its product portfolio strategy, go-to-market configurations, supply chain structures, digital customer support model and marketing. HPE expects that the plan will be implemented through to fiscal year 2022 and estimates that it will include gross savings - as a result of “changes to the company’s workforce, real estate model and business process improvements” - of at least $1bn. The plan is also expected to deliver annualised net run-rate savings of “at least” $800m by fiscal year 2022-end (when compared to 2019).

In order to achieve this level of cost savings, HPE estimates cash funding payments of between $1bn and $1.3bn over the next three years.