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Hewlett Packard Enterprise Rockets On Q1; Could It Reign In Cloud?

While investors applauded Hewlett Packard Enterprise ‘s first quarterly performance as an independent company — beating Wall Street estimates and driving its stock up more than 13% Friday — some analysts and owners are pushing CEO Meg Whitman to compete harder. That means more aggressively taking on cloud enterprise leaders Amazon ( AMZN ) and Microsoft ( MSFT ), and buying up software rivals such as Workday ( WDAY ) or Salesforce.com ( CRM ), rather than directing cash to shareholders. “I think we need to give Meg a chance to see if she can take advantage of the opportunities in servers with the cloud migration led by Amazon Web Services, Alphabet ‘s ( GOOGL ) Google and Microsoft on the service and software side,” said Daniel Morgan, vice president of Synovus Trust, which holds 251,971 shares of HPE, in a Friday interview with IBD. “Further, the 54% year-over-year growth in the Q1 2016 quarter in networking allows HPE to build more momentum in this space” vs. rivals Cisco Systems ( CSCO ) and Juniper Networks ( JNPR ), he said. “And finally as we discussed before, the huge opportunity to expand the software unit with its 17%-plus operating margins (enables) a large acquisition in the cloud space. Right now software is just 8%-10% of total HPE revenues.” Buying enterprise software rivals Salesforce or Workday specifically is “a chance to make that unit significant by bringing it up to 20%-25% of revenues,” he said. “Post-split, Hewlett Packard Enterprise was supposed to be the growth portion of the Hewlett-Packard Co., (creating) a reinvigorated growth company.” Nevertheless, happy with HPE’s earnings performance issued after Thursday’s market close, investors bid up its stock up 13.5% to close at 15.44 in the stock market today . That’s less than 3% below its Dec. 1 high since splitting from its parent Nov. 1. For now, HPE stockholders interested in growth of any kind will need patience because the company is still shrinking, despite the slight Q1 beat. Hewlett Packard Enterprise reported earnings of 41 cents per share in the fiscal Q1 ended Jan. 31, on sales down 3% to $12.72 billion vs. pro forma figures from a year earlier. The results slightly beat the average view of analysts polled by Thomson Reuters, which called for EPS of 40 cents on sales of $12.68 billion. The non-GAAP 41 cents EPS is down from 47 cents a year earlier. (However, if HPE had been a standalone company at the time, Q1 2015 adjusted EPS would have been 44 cents, the company said in a March 1 note.) That’s pretty much as planned, with HPE not projecting much growth until fiscal 2018. For Q2 ending in April, HPE expects EPS ex items of 39 cents to 43 cents. Analysts polled by Thomson Reuters expected Q2 EPS ex items of 42 cents on sales of $12.297 billion before Thursday’s earnings release, but on Friday, the revenue consensus was revised up to $12.332 billion. For the entire fiscal 2016 ending Oct. 31, analysts polled by Thomson Reuters projected $1.87 EPS ex items for fiscal 2016 ending Oct. 31, on revenue revised up Friday to $50.805 billion. HPE earlier had modeled $50.81 billion in revenue in fiscal 2016, down 2.5% from a $52.12 billion pro forma in fiscal 2015. The slightly smaller half of the old Hewlett-Packard Co., now called HP Inc. ( HPQ ), kept the legacy PCs, printers and ticker. HP Inc. lifted 0.6% to 11.18 Friday. Hewlett Packard Enterprise kept the enterprise software, servers, networking and financial services businesses. “Backing Up The Truck” To Buy HPE Stock To encourage patience among Hewlett Packard Enterprise shareholders, CFO Tim Stonesifer said HPE will “return at least 100% of our free cash flow outlook to shareholders” in fiscal 2016, after devoting $1.3 billion to share repurchases and dividends in Q1. In “addition,” Stonesifer said, shareholders will receive a “majority” of proceeds from the sale of a 51% stake in its Chinese server and storage business to Tsinghua Holdings, valued at $2.3 billion at the time the deal was announced last May. The transaction was supposed to be done by February, but Whitman said regulatory delays have pushed back closing to May, after which the cash will flow to shareholders. To UBS analyst Steve Milunovich, who complained in the post-earnings-release conference call that HPE shares were priced too low, Whitman chuckled: “We appreciate that, which is why we’re backing up the truck” to buy back more shares, which helps boost the price. Avoiding “Frankenstein Of Architecture” Whitman advised analysts that by investing internally and encouraging organic growth “you don’t end up with a Frankenstein of architecture” as the company would risk doing by growing through acquisitions. She cited HPE for pursuing both paths. “Our innovation engine is firing on all cylinders, and you’re going to see some amazing new introductions in the coming quarters in key areas of the portfolio, including servers, cloud, high-performance computing, IoT (Internet of Things), all-flash storage, Aruba and converged systems.” Aruba Networks is a networking leader in mobile enterprise that the old Hewlett-Packard agreed to buy last March for about $3 billion, strengthening the new HPE’s rivalry with Cisco Systems and Juniper Networks. As for “taking advantage of the disruption in the marketplace,” Whitman said, “we learned a lot about how to do this in the context of IBM’s ( IBM ) sale of their server business to Lenovo. … We have a big opportunity to go take (merging) Dell and EMC ( EMC ) business, much as we took a lot of the Lenovo business that would have gone to Lenovo.” She told CNBC on Friday that “in the last quarter, we had about 107 deals that we actually took from Dell/EMC.” She also told analysts that HPE has become the “leading infrastructure provider for SAP ( SAP ) HANA (application server) with nearly twice the number of shipments over the next competitor.” In the cloud, she said, “following a major wave of product releases across our HPE Helion portfolio in the second half of 2015, we are seeing strong customer traction. In fact, since separation, Helion has gained over 200 customer wins, including some of the world’s largest banks, service providers and industrials.” It just wasn’t enough for Needham analyst Richard Kugele, who chided the company in a research note issued Friday, arguing that the $2.3 billion windfall from Tsinghua should be spent on organic or M&A growth, not shareholders’ short-term benefit. “We had hoped that post-split, HPE would be able to focus on getting its house in order and leverage its cash and balance sheet to buy/invest in solutions that solve their product gaps,” Kugele said. “Instead, the company seems intent on continuing financial engineering by doubling its cash return to shareholders (including the pending Tsinghua cash). In our view, this creates no sustainable value for the company or its investors but merely provides a floor for the stock during a period of poor enterprise spending. “With no material growth, revenue improvement or product strategy to build a buy thesis around, we reiterate our hold rating on the stock.” Said Morgan, the Synovus Trust portfolio manager who wants to give Whitman time to execute: “I did hear HPE management touting its share repurchases and FCF (free cash-flow) generation capability on the call. And this is very reminiscent of when Mark Hurd was leading HPQ (the former Hewlett-Packard Co.) and grew the share price through financial engineering and not new product growth.” Hurd is now co-CEO of Oracle ( ORCL ), one of HPE’s toughest software rivals, and another legacy giant growing slowly.

Booming RSA Pits Security Rivals IBM, CyberArk, Palo Alto Networks

SAN FRANCISCO — CyberArk ( CYBR ) CEO Udi Mokady surveyed the crowd. A man decked in a traditional Native American headdress passed the booth — his movement highlighted by the nearby fire-truck-red semitrailer that Fortinet ( FTNT ) rolled in as its booth, and Palo Alto Networks ‘ ( PANW ) towering blue signage. Tweeted photos show a bright orange fox touting social media security firm ZeroFOX. Open-source manager Black Duck Software handed out “No ducks” T-shirts. And the entire event was overshadowed by a Terminator-Darth Vader mash-up mascot. “A lot of CEOs don’t even walk the floor,” Mokady told IBD at the annual cybersecurity RSA Conference in San Francisco’s Moscone Center convention hall. “But there are a lot of meetings that set the tone for the year, (there are) relationships happening behind closed doors.” If the RSA Conference sets the tone for the cybersecurity industry , 2016 will be marked by roaring noise — mostly in marketing. But execs tend to agree the overarching themes for the year will center on technological leaps and possible collaboration. Platform, Platform, Platform “Platform” is a buzzword for a reason, Needham analyst Scott Zeller wrote in a research report after Palo Alto Networks last month crushed Wall Street’s Q2 expectations. The broad-based platform approach works in security. But Palo Alto wasn’t the only vendor lauding its platform-centric approach at the RSA Conference. An overwhelming majority of companies — IBM ( IBM ), FireEye ( FEYE ) and Fortinet included — touted their platforms. Consumers are confused, Fortinet threat researcher Derek Manky told IBD. That’s where third-party testing comes into play. Fortinet calls it a “security fabric,” which integrates Fortinet’s firewall with threat intelligence data from FortiGuard researchers. “We can say how good we are, but there are a lot of third-party vendors that are doing validation of security,” he said. A recent test by NSS Labs ranked Fortinet’s FortiGuard 3200D and Check Point Software Technology ‘s ( CHKP ) 13800 NGFW Appliance as top products, blocking 99.6% of all exploits. The lab examined 13 leading products comprising 96% of the next-generation firewall market. Palo Alto Networks’ PA-7050 scooted in with 95.9% effectiveness, trailing a Juniper Networks ( JNPR ) offering and two Cisco Systems ( CSCO ) products with a respective 98%, 96.5% and 96.3% scores. Confusion is lending itself to the advent of software-as-a-service (SaaS) offerings, former iSight Partners CEO John Watters told IBD. FireEye acquired iSight in January for $275 million and retained Watters and much of the iSight leadership team. Watters sees SaaS making a play for the platform market. “The big trends line is customers are moving from best-in-class niche product to best-in-class platform,” he said. “And they’re moving from a self-serve model to an as-a-service model.” That shift benefits FireEye. New FireEye-as-a-Service billings nearly doubled in 2015 vs. 2014, CFO Michael Berry told analysts during the company’s Q4 earnings conference call in February. Data Sharing … Or Not Palo Alto Networks, Fortinet, Intel ( INTC ) Security and Symantec ( SYMC ) are leading a sector push to share threat intelligence data across the map. In 2014, the quartet became odd bedfellows in a security collaboration dubbed “the Cyber Threat Alliance.” Davis Hake, Palo Alto Networks director of cybersecurity strategy, told IBD the group’s goal is to reduce the noise generated by low-level, easy-to-launch attacks. “We take that data back out, and we work to democratize it with the rest of the security community,” he said. “It allows us to understand, across the community, attackers’ game plans against all of these other entities.” Palo Alto Networks CEO Mark McLaughlin, on the company’s recent earnings call, said the days of monetizing threat data are over. A company’s value stems from its overall platform, he says. Watters disagrees: “All the people that are driving sharing are people who don’t have a bunch of intellectual property,” he said. “Everybody is filling up each other’s in-boxes with all the same stuff. It’s all the machine-generated event data.” ISight fits into a detection hole in FireEye’s model, he explained. “We detect … everything that leads up the time they hit enter on the keyboard,” he said. “As soon as they hit enter, we went blind because we didn’t have attack surface monitoring.” FireEye’s incident response leg, Mandiant, sees the attack itself, watching how hackers escalate privileges, jump firewalls and burrow through systems. ISight detects the attack prep and follows the fallout on the black market. That intelligence is proprietary, Watters said. Because of that, FireEye doesn’t need to reboot its software every several years; the software is updated every hour. Fortinet makes a similar boast, noting its FortiGuard research updates systems every five minutes. Big Data, Internet of Things and AI Artificial intelligence (AI) won’t look like Haley Joel Osment in the 2001 Steven Spielberg flick. Rather, machine-learning will be bolstered by data-heavy Internet of Things devices, Sol Cates, chief security officer for encryption specialist Vormetric, told IBD. The trend could boost the chip sector. Tesla Motors ( TSLA ) partner Nvidia ( NVDA ) forged alliances with Facebook ( FB ) and Chinese Internet major Alibaba ( BABA ) during Q4 for speedy intelligence chips, Nvidia CFO Colette Kress said during last month. Just as “platform” is a commonplace buzzword, so too are Big Data, the Internet of Things and the cloud, Cates says. But they’ll also be integral to future technology — and that’s either a boon or a bust for the cybersecurity industry. AI generates two big questions for the sector, Cates said. “How do we protect the sensitive data going in? And how do we harness it for security?” he asked. The problem is, the cybersecurity industry often trails innovation. “We have to figure it out after the fact, and we’re not yet experts on it.” IBM, which just acquired Resilient Systems , plans to push machine-learning to accelerate automated penetration testing, Marc van Zadelhoff, the company’s security general manager, told IBD. Penetration testing — purposefully probing a system for vulnerabilities — will become more and more necessary in the security world as the BYOD (bring your own device) trend opens more endpoints. Gemalto exec David Etue argued during an RSA lecture that software updates could right the likely-to-occur wrongs as the cybersecurity sector tackles the Internet of Things market. “If we get this right, this puts us in a position for long-term success,” he said. Fortinet’s Manky says wrangling the Internet of Things and protecting Big Data will be more complicated than that. Industry experts estimate 20 billion-30 billion Internet-capable devices will come online in the next four years. “That generates a lot of noise, and there’s a lot of traffic, you need to inspect all of that,” Manky said. “Anything and everything is a target now. … If you think of any device that has an Internet connection, it’s got memory, it has a processor and a connection, and that’s all hackers need to go after (it).”

Apple-FBI Encryption Battle, Facebook Arrest Flash At RSA

SAN FRANCISCO — Apple’s ( AAPL ) encryption battle with the FBI flashed again Wednesday as Silicon Valley bigwigs largely sided with the iPhone-maker during the RSA Conference in San Francisco, Calif., saying the policies of their companies also wouldn’t allow for government backdoor access. The debate at the big annual security event also followed the arrest Tuesday of Diego Dzodan, a Facebook ( FB ) exec in Brazil, who refused to decrypt WhatsApp communications in compliance with a government order. Dzodan’s arrest was yet another flash point in the ongoing battle. Wednesday, a Brazilian judge ordered police to set Dzodan free. At an RSA panel discussion Wednesday Michelle Dennedy, Cisco Systems’ ( CSCO ) chief privacy officer, said the network gear giant, per policy, wouldn’t provide the government backdoor access to encrypted communications. Silicon Valley companies such as Alphabet ( GOOGL ), Facebook and Microsoft ( MSFT ) also have sided with Apple. Congress has yet to legislate backdoors, and outdated telecom laws don’t tackle the now-hot topic. The Paris terror attacks and a mass shooting in San Bernardino, Calif., have reignited the issue on Capitol Hill, where legislators are weighing privacy concerns against law enforcement needs. In the latter case, the FBI ordered Apple to decrypt the iPhone belonging to one of the two San Bernardino shooters. Apple is fighting the order. Cisco’s policy would put it in the same hot waters, Dennedy said. “We do not intentionally build in backdoors, and we do not do business with others who do,” she said. “That is our policy.” Dennedy’s position was echoed throughout the discussion, entitled “Can Government, Encryption, Backdoor and Privacy Co-Exist?” Backdoor access can act as a master key to all encrypted communications within a system. Apple’s engineers haven’t created that key, Apple CEO Tim Cook says. Juniper Networks Saw A Backdoor Exploited Intentional or not, backdoor access will backfire, Johns Hopkins University associate professor Matthew Green argued Wednesday. In December, Juniper Networks ( JNPR ) discovered unauthorized code running on an operating system backing their firewalls that let hackers decrypt VPN-protected communications, Green said. Experts have speculated a National Security Agency random-number generator, employed by Juniper, was to blame for the exploited backdoor. “This is the danger with backdoors,” Green said. “Juniper was protecting the Department of Defense and could not keep people from monitoring their code.” Richard Marshall, CEO of Secure Exchange Technology Innovations, says companies need to concentrate on existing vulnerabilities within their systems. “You don’t need a designed vulnerability (such as with a backdoor) when there are so many other vulnerabilities being exploited on a day-to-day basis,” he said. “It’s so much easier for those adversaries to break into our systems and violate our privacy.” But the panelists didn’t side entirely with Apple. Marshall argued that U.S., and other, consumers have accepted the idea of reduced privacy. Chenxi Wang, chief security officer for Twistlock and the panel’s moderator, noted Apple pushed a U2 album out to millions of phones but won’t hand over the keys for government access. “Is this a double standard?” she asked. “This is beyond a double standard,” Marshall said. “This goes to the actual user and their reduced expectation of privacy. It’s a dangerous, slippery slope.” Dennedy, on the other hand, argued that the young-adult millennial generation is “crying” for privacy. Everything from their individualized clothing to the use of Snapchat messaging says as much. And therein lies the opportunity, she said. “People are trusting their commerce, their culture, their families and their communities to us (as corporations),” she said. “We have an ethical obligation to build privacy into their systems.” Her advice for companies? “Educate your users about what they are getting into rather than assuming, because they’ve fallen for your monopolistic practices, that they like it.” Image provided by Shutterstock .