Why Is HP Enterprise (HPE) Down 5.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Hewlett Packard Enterprise (HPE). Shares have lost about 5.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HP Enterprise due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Hewlett Packard Reports Q1 Results

Hewlett Packard Enterprise Company delivered first-quarter fiscal 2019 non-GAAP net earnings of 42 cents per share, beating the Zacks Consensus Estimate of 34 cents. The bottom line also surged 31% 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 other income and expenses, lower-than-expected tax rate and lower share count owing to buybacks.

However, Hewlett Packard Enterprise reported revenues from continuing operations of $7.55 billion, which dipped 2% on a year-over-year basis and also missed the Zacks Consensus Estimate of $7.68 billion.

Adjusted for currency-exchange rates, the company’s revenues from continuing operations slid 1% year over year. Excluding Tier-1 server sales, revenues inched up 1% from the prior-year period.

The company expects revenue growth to accelerate in the fiscal second quarter and beyond and as a result, raised is EPS guidance for the current fiscal year.

Quarterly Details

Segment wise, Hybrid IT revenues of $6 billion declined 3% year over year, both as reported and at constant currency (cc).

Coming to Hybrid IT Products, Compute Value revenues slipped 3% to $3.4 billion. However, the metric grew 3% excluding the impact from the company’s strategic exit of certain Tier-1 customer segments.

The company’s Value Compute portfolio rose nearly 20%, aided by 50% growth in high-performance compute and a 70% uptick in hyper-converged offering.

Storage revenues climbed 3% to $975 million with particular strength in All-Flash Arrays, which improved 20%, boosted by Nimble. Big data also witnessed a strong quarter, recording 25% year-over-year improvement. The company expects the recently announced acquisition of BlueData to ramp up the metric further.

HPE Pointnext revenues declined 6% from the year-ago quarter due to the company’s strategic move to exit from low-margin countries in the advisory and professional service business.

Revenues from the Intelligent Edge ascended 5% to $686 million, backed by strength in Aruba Services. Notably, Aruba Services revenues were up 20% on consistent installed base growth.

Revenues from Aruba Product increased 3%, riding on strong growth across both wired and wireless LAN.

The company projects the launch of two important new solutions, the Aruba 510 campus access points designed for 802.11ax and the Aruba 8325 switch series, to drive growth in the quarters ahead.

The company’s Financial Services segment revenues increased 3% to $919 million. Double-digit growth in asset management business is a tailwind.

Geographically, Hewlett Packard Enterprise’s revenues in the Americas inched up 1% at cc. Double-digit growth in Core compute and mid-single digit growth in Storage drove results in the region.

Revenues in Europe were up 2% at cc, driven by double-digit growth in the UK and France. Core business and the Operational Services business witnessed strong growth in the region.

However, Asia Pacific revenues fell 9% due to softening of the metric in the China market. Asia Pacific without China grew in double digits.

Management also mentioned that channel business drove 70% of operations in the core Hybrid IT and up to 90% in Aruba. Double-digit growth in sellout through channel makes the management optimistic.

Operating Results

Hewlett Packard Enterprise’s gross margin grew 280 basis points (bps) on a year-over-year basis to 31.1%, driven by portfolio mix, supply chain efficiencies and reduced manufacturing overhead. Lower commodities cost also left a positive impact, although minimal.

In addition, the company’s non-GAAP operating margin expanded 160 bps to 8.9%. This improvement in margins was primarily attributed to cost savings from HPE Next.

Balance Sheet and Cash Flow

Hewlett Packard Enterprise ended the fiscal first quarter with $3.78 billion in cash and cash equivalents compared with $4.88 billion at the end of the previous quarter.

During the quarter under review, Hewlett Packard Enterprise generated $382 million of cash flow from operational activities compared with $1.3 billion in the sequential quarter.

The company’s free cash outflow was $190 million in the quarter under review.

Additionally, during the quarter under consideration, the company repurchased $814 million worth of shares and paid $157 million in dividends.

Guidance

For the full fiscal, Hewlett Packard Enterprise now expects non-GAAP earnings per share in the band of $1.56-$1.66 compared with the earlier projection of $1.51-$1.61.

Tier one revenue decline is diluting the company’s growth profile. Further, a near 2% currency headwind is an overhang.

However, the company predicts the impact from Tier one to become less dilutive to revenue growth toward the end of the ongoing fiscal year.

Robust enterprise demand environment coupled with its strong execution is likely to aid year-over-year growth rates beginning the fiscal second quarter. Solid momentum in high-performance compute portfolio and convincing growth in Aruba, courtesy of new offerings, make management upbeat.

For second-quarter fiscal 2019, Hewlett Packard Enterprise forecasts non-GAAP earnings per share in the range of 34-38 cents.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a flat path over the past two months.

VGM Scores

Currently, HP Enterprise has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

HP Enterprise has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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