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HP Enterprise (HPE) Down 0.3% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Hewlett Packard Enterprise (HPE). Shares have lost about 0.3% 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 catalysts.

Hewlett Packard Reports Mixed Q4 Results

HPE delivered fourth-quarter fiscal 2019 non-GAAP earnings of 49 cents per share, beating the Zacks Consensus Estimate by 6.52% and also the year-ago quarterly figure by 14%.

However, net revenues of $7.23 billion declined 9% on a year-over-year basis and also missed the Zacks Consensus Estimate of $7.46 billion. In constant currency (cc), revenues also fell 7% year over year. The company’s strategic decision to exit the lower margin Tier 1 server business coupled with certain macroeconomic factors impacted revenues. Weak server sales and soft storage hardware revenues are a dampener as well.

Uneven demand due to the ongoing trade tensions between the United States and China is a major overhang. Longer sales cycle for large enterprise deals is a headwind too.

However, robust growth in high-performance compute, Hyperconverged Infrastructure, Composable Cloud and HPE GreenLake orders is a key driver.

Quarterly Details

Segment wise, Hybrid IT revenues of $5.7 billion decreased 11% year over year (down 9% at cc).

Coming to Hybrid IT Products, Compute Value revenues dropped 13% (down 12% at cc). The figure also declined 10% excluding the impact of the company’s strategic exit from certain Tier-1 customer segments.

At cc, Hyper-converged infrastructure grew 14% while Composable cloud rose 21%.

However, storage revenues were down 12% (10% at cc).

Also, HPE Pointnext revenues declined 5% (4% at cc) from the year-ago quarter. Additionally, HPE Pointnext operational services orders including Nimble slipped 1% (flat at cc). Meanwhile, HPE Greenlake orders soared 72% year over year.

Although revenues from the Intelligent Edge were down 6% (5% at cc) to $723 million, Aruba Services revenues were up 17% (17% at cc). Revenues from Aruba Product deteriorated 9% (7% at cc).

Further, Hewlett Packard Enterprise’s Financial Services segment revenues declined 6% (5% at cc) to $878 million. But net portfolio assets inched up 1% year over year at cc. However, financing volumes contracted 9% year over year (7% at cc).

Geographically, Hewlett Packard Enterprise’s revenues in the Americas (40% of revenues) decreased 10% at cc. Also, EMEA (36% of revenues) revenues softened 8% at cc and APJ revenues (24% of revenues) fell 4% at cc.

Operating Results

Hewlett Packard Enterprise’s gross margin of 33.3% expanded 260 basis points (bps) on a year-over-year basis, aided by a favorable portfolio mix, HPE Next initiatives and commodity pricing tailwinds.

Hybrid IT segment operating margin expanded 250 bps to 13.8%. Moreover, Financial Services operating margin grew 80 bps to 8.4%. However, Intelligent Edge operating margin shrank 710 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 fourth quarter of fiscal 2019 with $3.75 billion in cash and cash equivalents compared with $3.69 billion at the end of the previous quarter.

During the quarter under review, Hewlett Packard Enterprise generated $1.4 billion in cash flow from operational activities compared with $1.2 billion in the prior quarter. The company’s free cash flow was $878 million. Additionally, the company repurchased shares worth $284 million and paid out $147 million as dividends.

Guidance

For fiscal 2020, Hewlett Packard Enterprise expects non-GAAP earnings of $1.78-$1.94 per share. Management reiterated its free cash flow outlook of $1.9-$2.1 billion.

For first-quarter fiscal 2020, Hewlett Packard Enterprise forecasts non-GAAP earnings between 42 cents and 46 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, HP Enterprise has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, HP Enterprise has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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