What Do The Server Quarterly Earnings Tell Us?

“Earnings season” has come and gone for the major server vendors, and there’s been much reporting on each company’s financials and respective outlooks. As one would imagine, there’s good and bad to take from nearly every quarterly earnings report, but given these days of Covid-19, it seems like looking at the downside of everything is more fashionable. In the next few paragraphs, I will do a quick breakdown of Dell Technologies Datacenter Group (DCG) and VMware, Hewlett Packard Enterprise (HPE), and Lenovo’s Datacenter and Intelligent Transformation’s most recent quarters, and why there are plenty of reasons to be optimistic. 

First, a few disclaimers

As one could probably tell from my opening statement, I’m not, nor do I pretend to be a financial analyst. My lens on quarterly financials is that of a techie with interest. But, I do believe that following the individual company’s earnings and PowerPoint slides used to drive earnings calls can tell a lot about that company’s focus. And looking at these reports in aggregate can tell us a lot about the market as a whole.

I have not included Cisco Systems in this coverage. It is not because I don’t recognize them as a significant player in the server market. Instead, it is challenging to discern the company’s server revenue from the rest, since it is combined with networking equipment. However, the company did show progress toward the conversion of perpetual licenses to subscription-based software licensing. Also, its security-related revenues showed strong growth as well (+10%), as well as its AppDynamics and IoT Software. These are two strategically important areas for the company, so it’s fair to say the company is executing its vision.

I have also not covered Inspur in this review. However, the company was one of the very few x86 server companies to show year-over-year (YoY) market share and revenue share growth. While the company generates a lot of that volume from the China market, it also supplies the global cloud computing market. 

Dell Technologies: Server business trending up and high-value servers show healthy growth

Dell Technologies ISG Financials
 DELL TECHNOLOGIES

The numbers for Dell Technologies Infrastructure Solutions Group (ISG) are down YoY. In total, ISG is off 5% YoY, with servers & networking coming in at -5% and storage coming in at -4%. However, servers & networking saw a 10% increase sequentially. This uptick may indicate that the impact of Covid-19 on server purchases and IT-related projects is softening for the company. Interestingly, the company reported decent growth in high-value server workloads, citing artificial intelligence (AI) and machine learning (ML) as specific workloads that are gaining momentum. This is good news for the company as these richly configured servers drive higher ASPs and margins.

I’m curious if the company saw an increase in richly configured servers designed to support the remote workforce with workloads such as virtual desktop interface (VDI). While some enterprise customers burst to the cloud for VDI support in the early stages of Covid-19, I believe the short term “work from home” trend will give way to a longer-term shift in organizations. Look for a significant and permanent shift to a remote workforce.

While I will leave storage analysis to my MI&S colleague Steve McDowell, it’s incredible to see Dell’s hyperconverged offering, VxRail, continue to grow at a double-digit clip. Some of this growth is undoubtedly the result of the pandemic. The “hands-free” nature of HCI deployments and provisioning make products such as VxRail ideal for infrastructure deployments requiring scale of compute and storage.

VMware: Another strong quarter

Dell Technologies VMware Financials
 VMWARE

The company saw strong YoY growth of 10%, with substantial contributions from areas that indicate the company is finding success in executing its strategy. MI&S Founder Patrick Moorhead recently wrote about VMware’s cloud-native strategy (coverage can be found here). In his article, he specifically spoke to VMware’s strategy of embracing the cloud via VMware Cloud Foundation (VCF) and supporting cloud-native environments and application modernization via VMware Tanzu. Interestingly, VMware highlights these as two of the largest revenue contributors. Not surprisingly, the company also saw a strong contribution from its Carbon Black native security offering.

VMware Cloud on AWS had a robust quarter, which indicates that the company has been able to serve its customer base during Covid-19. The company’s end-user computing (EUC) offering also contributed strongly. I would expect to see VMware continue to show strong growth in these areas as the infrastructure to support the remote, distributed workforce (and workplace) continues to deploy and take root.

One final observation on Dell Technologies quarter was found in its select financial metrics slide.

Dell Technologies Select Financial Metrics
 DELL TECHNOLOGIES

Note the company’s statement regarding as-a-Service offerings: $1.3B revenue run rate, up 30% YoY. This is a powerful testament to enterprise organizations’ desire to employ consumption-based infrastructure models, including PC-as-a-Service. 

HPE: GreenLake is exploding

HPE All Up Financials
 HEWLETT PACKARD ENTERPRISE

HPE’s quarter showed the company holding steady in server revenue, with 1% YoY growth. However, the company showed strong growth sequentially, with a 29% QoQ revenue increase. As with Dell Technologies, I believe HPE was impacted by the early panic associated with Covid-19, combined with a pre-existing softness in the market. As the enterprise IT market found its collective footing, some IT projects resumed, while others were initiated to support this “new normal” in enterprise computing.  

Perhaps the biggest takeaway from HPE’s quarter was the incredible growth the company saw in GreenLake revenue. For those not familiar with GreenLake, it is worth taking the time to understand this offering and its importance to HPE. At Discover 2019 (HPE’s customer and partner conference), CEO Antonio Neri declared the intent to deliver the entire HPE product portfolio as-a-Service by 2022 (my coverage can be found here). In other words, GreenLake is on-prem IT-as-a-Service. The company made a strategic bet that enterprise IT organizations would prefer to utilize the public cloud’s consumption model, with a more parallel and linear utilization-to-cost relationship. If an 82% YoY increase in revenue is any indicator, it’s safe to say that bet is paying off. 

There were a couple of things to note in HPE’s earnings call. The first is the mix of revenue contributions across product groups and regions. I like how the company shows how its portfolio is contributing, both in terms of revenue mix and enterprise transformation. This demonstrates a customer-centric view of its portfolio.

Secondly, the company continues to show a healthy global presence, as demonstrated by its regional revenue contributions. For those interested, one can view the regional revenue contributions of each product group (found here). It is interesting to note that the largest revenue contributor (compute) has a very healthy mix with the Americas contributing 39%, EMEA contributing 35% and APJ contributing 25%.

Putting HPE portfolio contribution into context
 HEWLETT PACKARD ENTERPRISE

A final note on HPE’s earnings – the company’s Advisory and Professional Services (A&PS) had a rough quarter, showing a 5% YoY decline and a 4% sequential decline.

HPE Pointnext – look for a rebound
 HEWLETT PACKARD ENTERPRISE

These numbers make sense. A&PS engagements tend to be strategic projects requiring many in-person interactions around business process analysis and deployment: much whiteboarding, planning, deployments and a lot of training. These are the very projects that are paused when a situation like Covid-19 rears its ugly head. Available resources are redirected to responding to the immediate needs of the organization. I believe Pointnext will rebound as organizations get back to executing against strategic initiatives. The organization has depth in both cybersecurity and edge computing–two areas of strength that will serve the company well.

Lenovo: Intelligent transformation showed strong growth 

Before getting into Lenovo’s growth in intelligent transformation, let’s look at the quarter it had in datacenter products (i.e., servers).

Lenovo DCG sees strong revenue growth
 LENOVO

As seen above, Lenovo saw strong revenue growth in both Cloud and Enterprise/SMB. However, these substantial revenue numbers couldn’t help the company avoid a loss in the quarter. Covid-19 partly explains this loss. It can also be explained by the investments the company made to expand its footprint in certain regions. It would be interesting to see an individual breakdown of its margins on its SDI, Services and HPC offerings. I believe these three strategic areas have helped offset some of the losses seen in Cloud and Enterprise/SMB.

One of the areas I did not see Lenovo report on is its TruScale consumption-based infrastructure-as-a-Service offering (perhaps this falls under the services pillar in the figure above). I believe this consumption model is a good indicator of how a server vendor responds to the shifting infrastructure market and how IT organizations are consuming datacenter resources. Lenovo has a very simple and straightforward consumption model in TruScale. This simplicity should make the service attractive to the market.

Lenovo’s Intelligent Transformation segment also saw a solid quarter, as seen in the slide below.

Lenovo Intelligent Transformation validates the company’s strategy
 LENOVO

This success is an encouraging validation of the company’s strategy. As with other vendors, Lenovo understands that IT’s future is not buying individual components assembled in a piece-meal fashion for use. Instead, it’s a combination of solutions and services that deliver a complete experience to the business. Further, the transformation of a business is fueled by the data gathered and intelligence gleaned from the edge. Accordingly, the company has made substantial investments in its Intelligent Transformation segment and is beginning to see indications that these were the correct investments to make.

Adding it up – what should we take away from the quarter?

The server and IT infrastructure market are in a transformative state, as the cloud’s adoption continues, edge computing emerges from a nascent state and cloud-native models bridge edge-to-cloud-to-datacenter. IT wants consumption-based models focused around solutions, and that is what the vendors are delivering. It appears we are starting to see evidence of this, as all three companies showed strong growth in its as-a-Service offerings.

Expect to see continued strong growth in future quarters as the impact of Covid-19 continues. The temporary measures put in place by enterprise IT to enable greater agility to a remote workforce will become permanent. Also, lights out deployment, provisioning and management will continue to drive new growth for each company as they respond to market and customer needs.