Hewlett Packard (HPE) Q3 Earnings Beat, Revenues Miss Mark

Hewlett Packard Enterprise Company HPE delivered third-quarter fiscal 2019 non-GAAP earnings of 45 cents per share, beating the Zacks Consensus Estimate of 40 cents as well as the year-ago quarter’s 42 cents.

However, net revenues of $7.22 billion declined 7% on a year-over-year basis and also missed the Zacks Consensus Estimate of $7.29 billion. In constant currency (cc), revenues slid 3% year over year.

Excluding Tier-1 server sales, revenues declined 3%. Notably, Tier 1 revenues plunged 30% and accounted for 2% of the top line, much lower than 5% in the year-ago quarter.

On the earnings call, management mentioned that deliberate actions through HPE Next including portfolio rationalization and some macroeconomic factors impacted results. Uneven demand due to the ongoing trade tensions between United States and China is a major overhang. Longer sales cycle for large enterprise deals is a headwind too.

However, the company’s organic investments in new products as well as strategic acquisitions enhance its ability to assist customers in their digital transformation journey, thereby aiding growth. Investments in high-performance compute, Hyper-converged Infrastructure, hybrid cloud and HPE GreenLake orders are key drivers. The company is also gaining traction from its strategic partnership with H3C.

Quarterly Details

Segment wise, Hybrid IT revenues of $5.5 billion decreased 9% year over year (8% at cc). Macroeconomic softness coupled with longer sales cycles in certain markets was a dampener.

Coming to Hybrid IT Products, Compute Value revenues dropped 12% (down 10% at cc). The figure fell 4% excluding the impact of the company’s strategic exit from certain Tier-1 customer segments.

At cc, high-performance compute inched up 2% while Hyper-converged infrastructure grew 4% and Composable cloud, 28%.

Storage revenues were down 5% (3% at cc). However, Nimble Storage increased 21% year over year. The launch of HPE Primera, a storage platform for mission critical workloads, during the quarter makes the management optimistic.

HPE Pointnext revenues declined 6% (4% at cc) from the year-ago quarter. HPE Pointnext operational services orders including Nimble were up 1% (3% at cc).

Moreover, HPE Greenlake orders grew 10% year over year at cc. Excluding a large deal in the year-ago period, the same surged 42%

Revenues from the Intelligent Edge dipped 3% (2% at cc) to $762 million. Aruba Services revenues were up 15% (16% at cc), driven by solid growth in EMEA and APJ on the back of customer wins. Growing traction from the new offerings that the company introduced for the mid and SMB markets is a tailwind.

Revenues from Aruba Product deteriorated 5% (4% at cc).

On a sequential basis, Intelligent Edge improved 14%, riding on the company’s U.S. product business, which was up more than 40% sequentially.

Hewlett Packard Enterprise’s Financial Services segment revenues weakened 4% (2% at cc) to $888 million. Net portfolio assets were up 2% year over year at cc. Financing volumes increased 2% year over year (5% at cc).

Geographically, Hewlett Packard Enterprise’s revenues in the Americas (41% of revenues) declined 7% at cc. Also, EMEA (36% of revenues) revenues declined 3% at cc and APJ revenues (23% of revenues) fell 5% at cc.

Operating Results

Hewlett Packard Enterprise’s gross margin of 33.9% expanded 340 basis points (bps) on a year-over-year basis, boosted by a favorable portfolio mix and commodity pricing tailwinds.

Hybrid IT segment operating margin expanded 250 bps to 12.7%. Further, Financial Services operating margin grew 90 bps to 8.7%. However, Intelligent Edge operating margin contracted 800 bps to 4.9%. Meanwhile, the company’s non-GAAP operating margin grew 80 bps to 9.9%.

Balance Sheet and Cash Flow

The company ended the third quarter of fiscal 2019 with $3.69 billion in cash and cash equivalents compared with $3.59 billion at the end of the previous quarter.

During the quarter under review, Hewlett Packard Enterprise generated $1.2 billion in cash flow from operational activities compared with $987 million in the prior quarter. The company’s free cash flow was $648 million in the period.

Additionally, the company repurchased shares worth $577 million and paid out $150 million as dividends.

Guidance

For fiscal 2019, Hewlett Packard Enterprise expects non-GAAP earnings of $1.72-$1.76 per share compared with the earlier projection of $1.62-$1.72.

Management reiterated its free cash flow outlook of $1.4-$1.6 billion, indicating more than 35% growth from the figure reported in fiscal 2018.

For fourth-quarter fiscal 2019, Hewlett Packard Enterprise forecasts non-GAAP earnings between 43 cents and 47 cents.

The company anticipates Cray acquisition to close by the end of the fiscal fourth quarter.

Zacks Rank & Stocks to Consider

Hewlett Packard Enterprise currently has a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader technology sector are Anixter International AXE, LogMeIn LOGM and Perficient PRFT, each flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Anixter, LogMeIn and Perficient is currently projected to be 8%, 5% and 10.8%, respectively.

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