Hewlett Packard (HPE) Q3 Earnings Surpass Estimates, Up Y/Y

Hewlett Packard Enterprise Company HPE reported fiscal third-quarter 2018 non-GAAP net earnings of 44 cents per share, which beat the Zacks Consensus Estimate of 38 cents and increased 42% on a year-over-year basis.

Management noted that the bottom line was driven by the company’s strong operational performance, favorable one-time benefits in OI&E and a lower-than-expected tax rate.

Hewlett Packard Enterprise reported revenues from continuing operations of $7.764 billion, up 3.5% on a year-over-year basis. Further, quarterly revenues outpaced the Zacks Consensus Estimate of $7.678 billion. The upside was driven by Hybrid IT, Intelligent Edge and Financial Services, particularly strong growth in Intelligent Edge segment.

Adjusted for currency-exchange rates, the company’s revenues from continuing operations increased 1% year over year.

Quarter Details

Segment wise, Hybrid IT revenues of $6.243 billion increased 3% year over year and remained flat at constant currency. The healthy IT spending environment is proving to be conducive.

Coming to Hybrid IT Products, Compute revenues increased 5% to $3.5 billion driven by strong momentum across public and private sector deployments. Storage revenues grew 1% to $887 million. Double-digit growth in big data storage has been a tailwind. However, data center networking revenues dropped 6% in the quarter.

HPE Point next revenues fell 1% from the year-ago quarter but overall orders improved 4%.

Revenues from the Intelligent Edge climbed 10% to $785 million driven by secure cloud offerings in the company’s campus segment. The company’s Intelligent Edge solutions are gaining traction among customers. In the quarter, a significant number of deals were won by Aruba. Moreover, the company’s Edgeline system is also witnessing strong traction in industrial IoT applications.

Revenues from Aruba product grew 10% backed by strong growth in campus switching and edge compute. Aruba services revenues were up 14% on continued installed base growth due to strong attach of the company’s software platform like ClearPass and AirWave.

The company’s Financial Services segment revenues grew 3% to $897 million on the back of asset management business.

Geographically, Hewlett Packard Enterprise’s revenues in the Americas grew 1% but declined 3% in constant currency. Core compute and the Intelligent Edge grew 10% in the region.

Revenues in Europe were up 3% in constant currency driven by growth in UK, France and Italy. EMEA results were driven by strength in compute and data center networking.

Asia Pacific revenues were up 6% at constant currency, with double-digit growth in Japan and Australia.

Operating Results

Hewlett Packard Enterprise’s gross margin expanded 140 basis points (bps) on a year-over-year basis to 30.7%. In addition, the company’s non-GAAP operating margin increased 190 bps to 10.1%.

The improvement in margins was primarily attributed to cost savings from HPE Next. Management was also positive about pricing and DRAM was less of a negative aspect compared to the previous quarters.

Operating margin of Hybrid IT segment expanded 270 bps to 10.6% driven by greater mix of Gen10, improved pricing and cost savings from HPE Next.Operating margin of Financial Services segment increased 20 bps to 7.9%.

However, operating margins of Intelligent Edge fell 300 bps to 11.6% due to higher investments in sales and R&D. Nonetheless, significant investment in Intelligent Edge is expected to help it maintain its leadership position in the high growth-opportunity market.

Balance Sheet and Cash Flow

Hewlett Packard Enterprise ended the quarter with $5.2 billion in cash and cash equivalents, compared with $6.9 billion recorded at the end of the previous quarter.

Long-term debt at quarter end was $9.963 billion compared with $9.970 billion recorded in the previous quarter.

During the quarter, Hewlett Packard Enterprise generated $1.25 billion of cash flow from operational activities and free cash flow of $751 million. Additionally, during the reported quarter, the company returned $1.1 billion to shareholders, of which $936 million was through share repurchases and the remaining through dividend payments.

Guidance

For fourth-quarter fiscal 2018, Hewlett Packard Enterprise projects non-GAAP earnings per share in the range of 39-44 cents.

Increase sales productivity and latest storage offerings are expected to drive organic growth in the fourth quarter. Management is particularly optimistic about HPE InfoSight and next generation HPE Nimble Storage platform to gain customer traction.

However, foreign exchange volatility is a concern. Management predicts less than 1 point of benefit to revenue in fourth quarter at the current rate.

For fiscal 2018, Hewlett Packard Enterprise now expects non-GAAP earnings per share in the range of $1.50-$1.55, up from the previous range of $1.40-$1.50.

The non-GAAP operating margin is anticipated to be a bit more than 9% compared with the company’s prior guidance of 9.5%.

Zacks Rank & Stocks to Consider

Hewlett Packard Enterprise currently has a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader Computer and Technology sector are Virtusa Corporation VRTU, Qualys, Inc. QLYS and Fortinet, Inc. FTNT, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Virtusa, Qualys and Fortinet is projected to be 20%, 8% and 16.8%, respectively.

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