Why HP’s Enterprise segment experienced a decline
Key takeaways from Hewlett-Packard’s 4Q14 earnings (Part 6 of 11)
Enterprise segment suffered another decline
HP’s (HPQ) Enterprise segment revenue declined 4% on a year-over-year (or YoY) basis. All of the key sub-segments of the Enterprise segment experienced a decline. These sub-segments include Industry Standard Servers, Storage, Business Critical Systems, and Networking and Technology Services. The Enterprise segment’s operating margin stood at 14.8%.
Leading players prefer low cost servers
According to Jed Scaramella, research director for enterprise servers at IDC (International Data Corporation), in the second half of 2014, Google (GOOG) (GOOGL) did a massive server buildout in excess of 100,000 units. This has boosted the shipments and market share of original device manufacturers (or ODM). An ODM designs and manufactures products, which are then sold under its brand name.
Scaramella also said that currently, almost no company is actually building its own servers. All the major hyperscale data centers are very involved in the design of their machines, but using third parties to do the majority of manufacturing.
The above chart shows the growth expected in Hyperscale servers brought on by demand for cloud, simplicity, and flexibility that has paved the way for new opportunities. For more detail about Hyperscale servers, please read Why HP faces stiff competition from Lenovo’s server business. According to IDC, HP commands approximately 25% of the worldwide server market and server CPUs.
Large cloud computing players like Amazon (AMZN), Google, and Microsoft (MSFT), expect to benefit a lot if they minimize their expenditure on server infrastructure. This is the same for Facebook (FB), which also has huge server usage and could lead to it using generic servers over brand-name servers.
This trend towards generic servers resulted from the advent and increased adoption of the cloud and it is a big concern for HP, as it means a market share loss for the company.
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