Sat, May 25, 2019 - Page 10 News List

HPE’s trade war outlook dampens profit optimism

CHINESE CONNECTION:The server maker’s joint venture in China, H3C, has been buying fewer products from its parent in favor of local goods for ‘profitable growth’

Bloomberg

Hewlett Packard Enterprise Co (HPE), a maker of server computers, raised its profit forecast for the year on deeper cost-cutting measures, but lingering trade worries tempered investor optimism.

Profit, excluding some items, would be US$1.62 to US$1.72 per share in fiscal 2019, an increase of US$0.06 per share from the company’s guidance announced in February. Analysts, on average, projected US$1.64.

Shares, which had jumped almost 5 percent in extended trading on the forecast, gave back all of the gains when executives said on a conference call that a trade war between the US and China had caused uncertainty for the company.

The stock closed at US$14.34 in New York and has climbed 8.6 percent this year.

HPE CEO Antonio Neri is trying to make the company a key hardware vendor for big data needs, seeking to take advantage of technology trends from artificial intelligence to the Internet of Things.

HPE last week said that it would acquire Cray Inc, which makes high-performance computers used to process vast amounts of information, in a deal valued at US$1.4 billion.

What might prove more consequential is the US-China trade war, which threatens to curb HPE’s revenue and raise some component costs.

Sales fell 4.3 percent from a year earlier to US$7.15 billion in the fiscal second quarter, which ended on April 30, the San Jose, California-based company said in a statement on Thursday.

Analysts projected US$7.4 billion, data compiled by Bloomberg showed.

Adjusted profit was US$0.42 per share, compared with analysts’ average estimate of US$0.36.

HPE’s sales have contracted year-on-year every quarter but one since 2017, and Neri has been keen to reverse that trend — betting US$4 billion on edge computing, which lets clients process information on hardware far away from centralized data centers.

The company’s “performance reflects our continued progress on shifting our portfolio to higher-margin products and services, to deliver positive and consistent earnings growth,” Neri said on a conference call with analysts.

The US-China trade war is creating “uncertainty” for the hardware maker, which reported declining revenue from China in the quarter, executives said during the conference call.

HPE generates revenue and profit from a joint venture in China that sells its products, H3C Technologies Co (華三通信技術). Tsinghua Holdings Ltd (清華控股) owns 51 percent of the company.

The joint venture underperformed expectations in the quarter, HPE executives said.

HPE is selling fewer products to H3C, which is offering more China-developed hardware for “profitable growth,” they said.

While HPE has an option to sell its stake in H3C in the next three years, Neri said that the company plans to hold on to the investment, because it is strategic and a valuable source of revenue.

“We’re very satisfied with our presence there,” Neri said in an interview.

He said he does not see a crackdown on companies doing business with China by the administration of US President Donald Trump affecting the joint venture, because HPE is not sharing intellectual property with H3C.

HPE might have to pay more for some assembly costs, as well as minor components that come from China, such as batteries and electronics, Bloomberg Intelligence analyst Anand Srinivasan said.

HPE builds products for the Asia-Pacific region in China, but also manufactures in the US, Mexico and Europe.

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