 From London, England, it's the Cube. Covering Discover 2016 London. Brought to you by Hewlett Packard Enterprise. Now, here's your host, Dave Vellante and Paul Gillis. Back to sunny and chilly London, everybody. We are in the docklands here in Excel London. This is the Cube, the worldwide leader in life, tech coverage. This is our third day of wall-to-wall coverage of HPE Discover 2016. This is the European show. About 10,000 people here. Last night was the big customer event. All the HPE folks were there, getting together. Number of customer dinners. Europe is known, well known for its intimate customer dinners in the evening. And they tend not to do the big, big bash blowouts. So the big party was somewhat subdued, but still there were a lot of people there last night. We've been covering HPE at Discover for about the last five years. Watching the transition of HPE from the Hurd era through the very brief Apatecker era and obviously the bulk of it being the Meg Whitman era five years ago, she embarked on a transformation agenda for HPE, cleaning up the autonomy acquisition and de-levering many parts of the company, shoring up the balance sheet. In the meantime, they've done a number of acquisitions. A couple of key ones that we've been talking about this week, Paul Gillin, my co-host, and I, Aruba, which is the most recent acquisition, which looks to be a real winner. And then a smaller sort of tuck-in for SGI, the well-known and ancient super computer company. The battered but unbowed. Yeah, right, they were Chapter 11 and almost went bust, but a little interesting tuck-in for HPE. So, I mean, on balance, we're clearly, as I say, seeing the improvement in the financials of the company, the stocks up this year, that's good news. At the same time, the company is narrowing its focus really into infrastructure. It was interesting yesterday when I said, hey, you're a pure play infrastructure company. Antonio Neary somewhat bristled. Said, that's not true. And, of course, what he meant was, there's a services component as well, and Antonio used to run the services business. Scott McNeely used to joke that services is where companies go to die. Now, of course, he used to say that about IBM, and then, of course, Sun Microsystems died and ended up getting acquired by Oracle, but nonetheless, this point shouldn't be lost, which is that living off of a services revenue stream is less sexy, and Wall Street looks at product growth. They tend to look at things, and for software companies, they look at license growth. For hardware companies, they look at new product growth. They tend to discount the revenue that comes from maintenance, which is kind of interesting, Paul, because that maintenance revenue is an annuity, but nonetheless, Hewlett Packard is really predominantly an infrastructure company with services that support that infrastructure, not break fix, you know, other horizontal services, but that's really what the business has become. Now, if you look at Microsoft, for 10 years, Microsoft stock didn't move at all. It was still the dominant company in its business. It had a healthy, growing top line, but it was not perceived as being on the leading edge of anything new, and I think HPE's challenge is to break out of that reputation of just being a company that's living off an annuity stream and really doing something that's fresh and innovative. Innovate, that was their theme for a long time. Invent, right? Invent, right. And we've got, their IoT initiative looks interesting. I'm not sure it's very differentiated, saying we're the IT and IoT. I mean, everybody's got an IoT initiative right now. I don't see theirs as being all that different. Their software business, they seem to be almost allergic to software, judging by the giveaway of the OpenStack business to SUSE, which was announced yesterday, didn't no cash change. The OpenStack distro. OpenStack distro, yeah. No cash changed hands. They basically gave the business to SUSE trying to get out of that business, which is fine. I mean, they're making a statement. Well, be clear. Be clear. So what they're doing is they're basically, it's a cost-cutting move. They're saying, okay, because when you do an OpenStack distro, you have to have a bunch of committers writing code for open source, and it's expensive. You got headcount that's writing code and not, you're not monetizing that. So they said, let's get rid of that cost. We'll give it to SUSE and there are other products to cover. And partners. They're giving everything that's a cost center outside of their basic data center infrastructure. So they're essentially becoming a reseller of that product. So HPE is comfortable reselling a lot of technology. We saw that with ERISTA. It's a lower margin business. So the question has always been, what is the Hewlett Packard IP? That's the question that they got in the herd era. And then, so what you saw were attempts, and certainly Appatec are trying to do this, attempts to vertically integrate with software, both Vertica and Autonomy. That was, clearly, the intent was IP. It was IP that was the body rejected, if you will. Well, their IP, clearly now in the data center, is this idea of a pool of resources that can be flexibly allocated and managed a la cloud. Whether they can deliver on that, there's a lot of excitement and a sense of the show about that idea, whether they can deliver on it is something we'll see over the next year. They're beginning to ship these products now and the time will tell, the customers will tell the story. Well, if you don't own the operating system, you don't own the chip set, and you don't own the software, what's left? Okay, the hardware, which is increasingly under margin pressure, and the management components. Meg Whitman made the point on day one that we're still in the software business. Yes and no, they're in the software business to manage infrastructure. That's software, like EMC's in the software business. So, it's not a pure play software business model, which was the intent of Autonomy and Vertica, which clearly are higher margin, pure play software business models. Hewlett-Packard is choosing to focus and go with and be comfortable with a lower margin predominantly infrastructure business. And their IP is technologies on top of that to manage that, like those pools of infrastructure. Well, back to IoT. Their differentiation in IoT to me, I think is the connectivity of Aruba. So, if you're going to instrument the windmill, you got to connect to the windmill. So, Aruba is a good opportunity to do that. The other piece of IoT, however, that HPE is going to have to partner to deliver on is the analytics. You know, IoT ain't so much to me anyway, about the things. Obviously, it's about the things and instrumenting the things, but it's the data around the things. We were hoping to have Bill Ruan today, but my understanding is he had to fly back to the States on short notice. But you think about what GE is doing. Why is GE trying to become a Silicon Valley software company with thousands and thousands of employees, it's all about the data. They're trying to harness that data and be able to make proactive decisions in near real time about all those industrial things that they have out there. And that's a key piece of it. So, the big question is, how does HPE leverage the data play? And it has to do that through partnerships and reselling. And it just divested, it's analytics play. It's a Vertica engine. So yeah, they'll have to do that through partnerships. I'm curious about GE. There was talk yesterday, Antonio Neary was talking about how close that partnership is becoming. Love to see if there's going to be more of a formal business relationship there. GE doing $6 billion in IoT analytics business this year, they claim, clearly has the pole position in the industrial internet of things, which is where the action is right now. And that's a natural place for HPE to play. Well, it's interesting, so GE made, I believe it was a $100 million investment in Pivotal. So there's a relationship obviously that they have with Dell. So they're hedging that. They've obviously got a relationship with Hewlett Packard Enterprise. GE, I don't think, is going to dance with IBM. I think IBM and GE are more competitive in this world and that whole IoT space. Well, IBM is an analytics company. And GE wants to be an analytics company. Yeah, that's right. Both analytics and IBM's acquisition of the weather company really was as much of an IoT play as it was a data play. One billion endpoints the weather company plans to have. Yeah, that's right. And my line on that is Dell buys EMC, IBM buys a weather company. What does that tell you about the two companies' strategies? You know, a lot of ways to skin a cat. But essentially what we see here is Dell EMC lining up against HP with a business model that is ostensibly high volume, lower margin, with not a huge software component. You've seen Dell get rid of some of its software pieces. Although Dell still maintains Pivotal and VMware. You know, people are speculating that Dell would sell VMware. I don't think that's the case. I've heard rumors that Amazon's going to buy VMware. I don't think that's the right move for Dell. It's too strategic. It's too high a margin business. It's too much leverage there. But I think people feel as though Dell needs to do that to pay off the debt. Is a strategic to Dell or is it just a big valuable asset that they can mill? Personally, I think both, really in part because it is a big valuable asset that they can milk. I mean, imagine EMC without VMware. How uninteresting that company would have been in the last ten years. Yeah, you talked about world story. Yeah, absolutely, and a margin story. So I think there's a lot of confusion about Dell EMC. We'll see with the interest rate rising climate, that all means. But without being a public company, they don't have to do dividends. They don't have to do share buybacks. And I think they can service that debt. And I've had this conversation. We've had this conversation with Michael Dell on theCUBE, and they can service that debt quite comfortably out of cash flow and still have money left over for acquisitions. I mean, that seems to be, and I've checked that data point with a number of people internally at Dell EMC. I don't see that as the big problem. If the interest rate climate changed dramatically, that could become a problem. And then maybe they'd have to do something drastic. But you look at HPE. HPE returned $3 billion to shareholders last year in the form of dividends and stock buybacks. And they maintained $2.1 billion in free cash flow. So there's, they've got a service that, I mean, it is for the stock, but by reducing the flow. It's good for the stock, it's good for the shareholders, but when you're sitting on that amount of cash, you remember when Microsoft paid its first dividend to shareholders, it did so under the kicking and screaming, because that was a sign that they didn't have any more places to invest. So share buybacks are, as a way to boost the stock price certainly has been effective in that respect, but where are they going to invest? If they really are not in the software business, and we didn't hear any indication from the executives we talked to that they're going back there, where are the areas to invest? Hardware is going to be tough, as you point out. Dell is comfortable living in a low margin world. You've got Huawei, and you've got the white box competitors from overseas that are working on even lower margins. So HP is going to be pressured in that area, and they've got to innovate in the management and in the architecture, in ways that are really, the customers really understand, they really value. So what we're hoping to do today is we want to tie a bow on HPE Discover 2016 London, really trying to bring into focus some of the changes that have been taking place, and try to really look forward to what the new HPE is going to look like without EDS, with the micro-focused spin-in, without the software component. Really, the EG business is now HP going forward. That's an 11% last quarter operating profit business. It's been as low as seven, it was 7% for the entire year. HPE's got to get that operating profit up and those margins up, but still it's a low to mid-teens operating profit environment, whereas as we've talked to you many, many times about AWS's operating profit and the last quarter was about 32%. So, three times HPE's operating profit, that's a big delta there, so HPE obviously is comfortable with that business model. So that's something that we're going to try to sort of look forward to today. We'll be covering all day today, we got a number of guests, Paul Gillan and I will be here. This is theCUBE, we're in London, we'll be right back.