On this episode of the Making Markets Podcast, host Daniel Newman shares his insights on the market’s positive reaction to earnings for:
- HPE. The company beats the street on small YoY Top line growth, but shows some strength in key areas.
- Zoom. Their healthy quarter is met with a turbulent response.
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Daniel Newman: Top-line growth is part of the story. When you grow 300% plus due to a pandemic fueled collaboration boom, 54% growth sounds the alarm for some. For other companies, growth beneath the top line can sometimes be a better indicator of a company’s prospects. Today, I dive beneath the surface of Zoom and HPE, after both posted earnings this week. There’s always more to the story. So here we go. You are tuned in to making markets.
Announcer: This is the making markets podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the companies featured on the show. The Making Markets Podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.
Daniel Newman: Hey everybody. Welcome to episode number five of Making Markets. It’s the end of the first week of September, heading into Labor Day weekend. If you’re listening to this before, it means I was able to get it out. If it’s after Labor Day, it’s because some people are trying to take a little bit of a rest, but here on Making Markets, we’re trying to react to all of the most interesting news of the week, in the text base and what’s been going on. It was another week. It did not let down. If you haven’t had the chance to check it out, we did have Tom Siebel, CEO of C3, join the show this week, great conversation with Tom. He covered their most recent earnings. I would just bounce you straight over to there, not going to cover that here, because you have the chance to hear it from him, and of course, to get our opinion on that same pod.
What I am going to talk about today though, is there were two other big tech earnings that came this week, that there are some underlying stories, and I think they both warrant a little bit of attention. The first would be Zoom, which happened earlier in the week. I’m going to actually come back to that one, and I’m going to finish on that one, because there’s a lot to unpack on that. Then just yesterday, Hewlett Packard Enterprise, HPE, the enterprise side of the HP split off, which is a few years old now, reported its earnings just yesterday as well. There’s a bit of a story there, that definitely deserves some additional attention and consideration. Let’s start with HP. This company fits into that group of big IT OEMs, that are really focused, historically, on selling lots and lots of stuff that fills up racks, servers, storage, and networking, but this is a company in transition. Here at Beecham research, we’ve actually written a few of the pieces, just about 2019, in that timeframe, CEO, Antonio Neri came out, and he was basically pivoting this business, putting it straight up on his head.
He said, “We are going to be able to deliver everything in our portfolio as a service by 2022.” Well, here we are in the late stages of 2021, and that has been the focus of the company. The top-line, the company has definitely felt a bit of the pinch of the pandemic. Over the last year, it slowly started to return to overall top-line growth, and in this quarter, it did that as well. It met the expectations of a straight, with about a 1% growth, came in a little bit above EPS, definitely showed its prowess on the operating side by beating the operational income expectations of the company, also, therefore, are performing on the earnings per share. On the other hand though, the story isn’t really just about the top-line, when we look at HPE. When I’m looking at HPE, I’m looking a lot at how they’re, as a service, and their recurring revenue businesses are growing, because that is what CEO Antonio Neri had really promised, was the company was going to shift its business model, deliver everything as a service, and create a more robust and predictable business for the company.
By the way, delivering as a service gives it its own way to play and participate in this cloud transformation that’s going on. A couple of numbers though, that I really did like to see, and I’ll come back to the ARR one in a moment, but one was the strength of order. While the company only grew 1%, the overall order of the book was up about 11%, which means the growth is coming as the ability to fulfill on that backlog of orders, because we’ve heard this before from a couple of companies. We also saw that record levels of orders were coming in through some of the different parts. There’s momentum in the top-line. This comes in areas like Intelligent Edge, which has been a very robust business for the company. The Intelligent Edge business was up 23%, but the level orders hit record levels. Again, not necessarily all reflected in this quarter, but something that will be reflected into the future.
We also saw the high-performance computing numbers look strong, and they’re looking at a revenue growth at 8+% in the year, but that brings me back to the big number that I really wanted to pay attention to, that I think anybody that’s examining the company needs to be thinking about, and that’s the whole, as a service, pivot. Is HPE basically executing on this goal, because what we do know is with the rapid growth, you look at the Azure growth numbers, Google Cloud growth numbers, AWS growth numbers, all very robust. You’re talking north of 30%, even for AWS as the businesses you’ve served, $14 billion in a quarter. For HPE, they’re seeing big growth as a service at over 30%, which means that GreenLake business, that’s really the focal point of the company’s forward-looking strategy is growing at a good clip. It needed to continue to grow at over 30%, that’s what Neri promised the market. That’s what it did once again, this quarter.
Perhaps more interestingly, the orders for their as a service business are growing at an even faster pace, 46% on a year, over year basis, another really important data point to keep an eye on. If this, as a service business is going to realize its ultimate potential, it needs to effectively keep growing at this rate. The company just had another $2 billion win outside of just the GreenLake space. That was announced. It was in with the NSA. I’m just double checking that, but I believe it was a high-performance computing deal with the NSA at over $2 billion. Then, like I said, the other area going back to the as a service is $5.4 billion is the total contract value for that business. Keep an eye on the GreenLake number, keep an eye on the as a service broker. That, to me, is the biggest indicator and the story beneath that top-line revenue that everybody needs to pay attention to. Let’s flip over here to Zoom. Zoom has been an absolute Cinderella story. It’s been the darling of the pandemic. This company saw its stock go into the upper 500s.
You’re talking about a company that, in 2018, did about $200 million in revenue, and they just [usurped] a billion dollars in this most recent quarter. For these great results, 54% growth, the market met it with a huge sell-off. The stock went down over $50 a share at some points, after it reported its earnings. I wrote an op-ed on MarketWatch, and you can go ahead and grab that out of the show notes. I really try to dive into this one, but we really have two forces here. You had a stock that had an extraordinary run up on a series of 300+%, top-line revenue growth quarters that were fueled by these unfortunate circumstances of the pandemic. It was a, hopefully, once in our lifetime event, and it certainly turbocharged the company, but to some extent you could think that maybe that run-up got in front of itself, but at the point in which this latest earnings came out, it had already retraced almost 40% of its share price, and it was sitting at about $350. Like I said, after the earnings drop, it felt under $300.
My assessment is, we’re back at a really good point for the company Zoom, like I said, still growing over 50%. Now, we’re looking at pandemic over pandemic quarters. We’re not in a situation now, where they’re growing against that smaller 18, 19 revenue number, but they’re really growing against the quarters that already saw the benefit of that early onset growth of taking school to remote, taking work to remote. When I look at the numbers, I would say, here are the three that I look at most importantly, when you want to assess where Zoom is at. You look at their large customers, you look at the businesses that are turning into paid customers, then you look at the businesses that are spending more money with Zoom. In all three areas, the company had a pretty good result. They look at their companies, more than 10 customers that are paying, that jumped 36%. They grew over 504,000 customers now, of more than 10 employees that are paying for the Zoom service. That’s a great subscription revenue.
Or, you’re talking about net revenue expansion, where those companies are spending more money for, I think, it’s the 13th straight quarter now, grew at over 130%. Then, they saw their $100,000 a year customers, which are the quote unquote large customers, rise now to over 2,278. In this quarter, another story around Zoom was the acquisition of Five9. You’re seeing the company go horizontal, which is an important thing. They’re competing with the likes of Salesforce, which just acquired Slack for this central ecosystem of collaboration, customer experience, and interaction. You’re also seeing them compete with Microsoft Teams, which arguably, I don’t even know if you could argue this as the most complete horizontal and vertical stack with Azure, the IaaS level with the platform level, the power platform, and of course the ERP and CRM through Dynamics 365 and their business applications. Then of course, you tie in Office and Work. That’s what Zoom is competing with.
Zoom went horizontal with Five9 to make their platform more extensible, more than just meetings. Now it’s meetings, it’s going to be contact center, customer experience, and of course you’re seeing them go from meetings, also into bigger platforms like Webinars and large hybrid events. Zoom, which is notorious for its easy to use platform, I think, is going to be popular in this area. It’s going to be interesting to watch how much it’s able to expand by using the Zoom platform to deliver these larger hybrid events, but this Five9 expanded the TAM by over $24 billion, taking it from $62 to $86 billion in total market opportunity. The extensibility of the platform, the connection to more applications is going to be important as it goes forward, because competing with the Salesforces and Microsoft is, in my opinion, the biggest risk that investors have for this company. It’s the biggest risk that Zoom has for itself.
How does it continue to differentiate, compete, and connect to these bigger systems of record, and all of these productivity tools address the asynchronous way we like to communicate on messaging apps like Teams, WebEx, Slack through Zoom and see, does it gain adoption in things like Chat? But overall, I think Zoom saw a pretty unreasonable response, but this is what happens in the, “Everything that goes up, must come down.” Well, for Zoom, I think this is a little bit of a retracement, based upon a temporary slowing of growth, but this is normal. This is what the market should look for. It’s growing 25%, 50% now at over a billion dollars a quarter in revenue. I think the market should see this as a strength, as a place that they can lean into, that Zoom has been well adopted, and that’s not going to change when the pandemic ends. When we return to more normal, hybrid, remote, video, collaboration, Chat, these are all things that are here to stay. I think Zoom is here to stay with it. Busy week here, HPE and Zoom on this episode.
Like I said, check out that C3 AI conversation I had with Tom Siebel, enjoy you coming in, expect more episodes very soon. I’m off to Germany for the big IAA Automotive and Mobility event. I know, I’m traveling, but I may have some insights from there. If not, I’ve got some great CEO’s lined up to join the show in the next week. Of course, we’ll be covering all the big stories around earnings, investors, tech, and bridging those gaps here on Making Markets. See you later.
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