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Hewlett Packard Enterprise (HPE) Q3 Earnings Preview

Mitchell Moore

Hewlett Packard Enterprise HPE is down 0.4% YTD, lagging the S&P 500’s 14.3% gain. For such an established company, the stock has seen a lot of movement in the past year.

HPE stock currently sits at $13.08, has a 52-week high of $17.59, and has a 52-week low of $12.09. This is a 42% gap between highs and lows, yet these changes all happened rather gradually, allowing investors time to take advantage of gains.

Overview

Hewlett Packard Enterprise is an enterprise information technology firm based in San Jose, California. The company was formed in November 2015 after it was split from the Hewlett-Packard Company. The newly formed HPE took the server, software, storage, and network businesses, while HP Inc. took its PC and printing businesses.

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HPE Currently produces various types of enterprise products including servers, data-storage products, hybrid infrastructure, edge computing services, and network equipment. HPE held 17.8% market share in the global server space, second only to Dell’s 20.2%, as of Q1 2019.

Last quarter, HPE reported revenue of $7.1 billion, down 4.3% over a year earlier. However, if we exclude Tier 1 sales (sales of parts to other manufacturers) and currency impacts, Q2 2019 revenue actually grew 1%. Earnings for the quarter came in at $0.42 per share, up 23.5%. This growth reflects HPE’s focus on shifting to higher-margin products and services.

HPE’s revenue has seen significant volatility since its spinoff from the combined Hewlett Packard. With that said, the company made a large number of acquisitions, spinoffs, and sales in the past four years. Acquisitions include flash manufacturer Nimble Storage for $1.2 billion and supercomputing firm Cray for $1.3 billion.

Q3 Outlook & Beyond

Our Zacks Consensus Estimates call for Q3 revenue, due out August 27, to shrink 5.5% from a year ago. Fourth quarter revenue is then expected to slip 3.8%, with full-year 2019 revenue projected to drop 3.6%.

Earnings for this quarter are estimated to drop by 11.3%. Next quarter, earnings are projected to drop 2.2%. However, full year earnings are expected to jump 7.1% over fiscal 2018 to $1.67 per share. Fiscal 2020 is then predicted to see another 6.72% rise in earnings over 2019.

In June 2018, HPE rolled out a service called GreenLake Hybrid Cloud which is designed for cloud management and cost control capabilities. It runs with Amazon AMZN Web Services, Google GOOG Cloud and Microsoft MSFT Azure. This hybrid cloud functions on a software-as-a-service model (commonly referred to as SaaS), which is generally more profitable than one-time platform sales.

HPE announced a plan in June 2019 to become a completely SaaS-based company by 2022. The company has stated that this could boost margins and attract more customers because it is less expensive for customers to only pay for what they use.

Bottom Line

Hewlett Packard Enterprises currently holds a Zacks Ranks #3 (Hold), as earnings estimates have come down slightly in recent weeks. HPE operates in some of the most vital areas supporting 21st century businesses, and can hopefully continue to innovate and maintain its considerable market share.

When HPE reports earnings on Tuesday, August 27 after the close, investors will see if trade war tensions and other factors impacted performance this quarter, or are expected to moving forward. But, if HPE can execute its transition to SaaS effectively over the coming two years, investors will likely see significant margins and earnings increases.

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