It has been about a month since the last earnings report for Hewlett Packard Enterprise (HPE). Shares have added about 4.3% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is HP Enterprise due for a pullback? 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.
HPE Reports Q2 Results
Hewlett Packard Enterprise Company reported second-quarter fiscal 2019 non-GAAP earnings of 42 cents per share, beating the Zacks Consensus Estimate by 6 cents. The figure rallied 31.3% on a year-over-year basis.
However, net revenues of $7.15 billion declined 4.3% on a year-over-year basis and missed the Zacks Consensus Estimate of $7.44 billion. At constant currency (cc), revenues slid 2% year over year.
Excluding Tier-1 server sales, revenues inched up 1%. Notably, Tier 1 revenues declined 64% and accounted for 1.9% of revenues, much lower than 5% in the year-ago quarter.
Segment wise, Hybrid IT revenues of $5.64 billion declined 4.4% year over year (down 3% at cc).
Coming to Hybrid IT Products, Compute Value revenues slipped 5.2% (down 4% at cc) to $3.09 billion. However, the figure grew 4% excluding the impact from the company’s strategic exit of certain Tier-1 customer segments.
Hewlett Packard Enterprise’s Value Compute portfolio revenues increased nearly 8% at cc, aided by strong growth in high-performance compute, and hyper-converged and composable cloud offerings.
Storage revenues climbed 3.3% (5% at cc) to $942 million, with strength particularly in Nimble, XP and Entry Storage. 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 6.8% (3% at cc) from the year-ago quarter to $1.60 billion. HPE Pointnext operational services orders, including Nimble, were up 1% at cc.
Moreover, HPE Greenlake orders grew 39% year over year at cc.
Revenues from the Intelligent Edge declined 5.7% to $666 million. Aruba Services revenues were up 15.6% (18% at cc). Revenues from Aruba Product decreased 8.3% (7% at cc).
Hewlett Packard Enterprise’s Financial Services segment revenues decreased 2.2% (up 2% at cc) to $896 million. Net portfolio assets were down 2% year over year (up 1% at cc). Financing volumes declined 10% year over year (6% at cc).
Geographically, Hewlett Packard Enterprise’s revenues in the Americas (37% of revenues) declined 7% at cc. Both EMEA (38% of revenues) and APJ revenues increased 1% each at cc. Non-U.S. net revenues were 69% of net revenues.
Hewlett Packard Enterprise’s gross margin expanded 200 basis points (bps) on a year-over-year basis, driven by favorable portfolio mix and cost efficiencies. Non-GAAP operating expenses were up 1% year over year.
Hybrid IT segment operating margin expanded 140 bps to 11.4%. Financial Services operating margin expanded 190 bps to 13.3%. However, Intelligent Edge operating margin contracted 490 bps to 3%. Hewlett Packard Enterprise’s non-GAAP operating margin expanded 70 bps to 8.9%.
Balance Sheet and Cash Flow
The company ended the second quarter of fiscal 2019 with $3.59 billion in cash and cash equivalents compared with $3.78 billion at the end of the previous quarter.
During the quarter under review, Hewlett Packard Enterprise generated $987 million in cash flow from operational activities compared with $382 million in the prior quarter. The company’s free cash flow was $402 million in the quarter under review. Additionally, the company repurchased $814 million worth of shares and paid $157 million in dividends.
For fiscal 2019, Hewlett Packard Enterprise expects non-GAAP earnings of $1.62-$1.72 per share compared with the earlier projection of $1.56-$1.66. Management reiterated the free cash flow guidance of $1.4-$1.6 billion, indicating more than 35% growth from the figure reported in fiscal 2018.
For third-quarter fiscal 2019, Hewlett Packard Enterprise forecasts non-GAAP earnings between 40 cents and 44 cents.
How Have Estimates Been Moving Since Then?
Fresh estimates followed a downward path over the past two months.
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.
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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