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HPE beats on Q3 profit, reinstates outlook

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down the earnings report for HPE with Daniel Newman of Futurum Research.

Video Transcript

ALEXIS CHRISTOFOROUS: Shares of HP Enterprises are on the move this morning after a positive earnings report, to say the least. The company beat on both the top and bottom line. Let's bring in Daniel Newman of Futurum Research, who covers this stock, to discuss. Good to see you, Dan. So what was your big takeaway from from this earnings report?

DANIEL NEWMAN: So for HPE, it's a company that definitely was under some pressure from its second quarter. The big, born-on-cloud stocks, Microsofts and Amazons, have seen huge growth. But companies like Dell, HPE, Cisco have seen slower growth, slower return to normalcy.

And for HPE, what I really was looking for was that sequential growth, quarter-over-quarter. Are they showing-- was Q2 the bottom? And that's really what I wanted to know.

And I actually the chance to talk to CEO Antonio Neri. And he and I kind of went back and forth on that exact topic yesterday after the earnings call. And he believes that, and I really believe, that the bottom has been hit for HPE. And going forward, it's really going to be about returning not just sequential growth, but now getting back to year-over-year growth, seeing segments like computing, storage grow.

But the other side of the story for me, Alexis, was really all about the company's recurring revenue. A year ago, Antonio Neri announced a shift to an everything-as-a-service model for the company. They're going to take all the hardware, their typical cap ex solutions, and put them into services.

And that business has grown. They saw double-digit growth sequentially and year-over-year, 11%, which was a really encouraging number. And their GreenLake business, which is really kind of the cornerstone of their growth strategy, saw 80% growth. So those are some pretty encouraging numbers for a company that had been under a lot of pressure and seen their stock down I believe over 40% year-to-date.

BRIAN SOZZI: Daniel, when you talked to Antonio, did he give you any sense on how much more in costs they might take out of this business? If there's any thread that ties HPE, Dell, and HP Inc. together, it's just the massive amounts of cost they've been able to take out the past year or so.

DANIEL NEWMAN: Yeah, they-- I believe the number that was planned was somewhere around $800 million in reductions. And those cost reductions certainly contributed to the company being able to achieve higher earnings this quarter against lower revenue year-over-year. Now they did beat on the expectations for this quarter. But against last year, they're still a little bit off the number.

And taking those costs out was going to be a critical short-term measure. I think most of us would agree saving your way to a profit is not a great long-term strategy. But we knew that with all the pressure, the kind of business that these big OEMs have, the lower margin on their traditional hardware sales, and in the case of HPE, really a reinvention of their business model entirely, was going to require some paring back on their traditional cost structure to be able to push forward with new marketing and new business, to really offer this on-prem, cloud everything approach, which is what they're doing. They really want to be a company that sells a lot of their products and services, like AWS or like Azure does as a cloud service, but delivering them on-premises for their enterprise customers.

ALEXIS CHRISTOFOROUS: And I guess, Dan, in a sign of confidence about the future, they actually did offer some guidance for the fourth quarter. How did that guidance stack up to what you were-- you were expecting?

DANIEL NEWMAN: Yeah, I mean, as an industry rather than an equities guy, I don't track it as closely as a traditional equities guy would. But I was nervous that they were going to come out and not give guidance. Some of these bigger enterprise companies that didn't do it, and it's been met with a lot of pressure the minute these companies can't say what their expectations are. This, to me, shows that Antonio, the board, and that HPE has a handle on its business, has an understanding of where the business is going, where growth is going to come from.

As Brian said, where these cost-containment strategies are coming into play, this recurring revenue and this new GreenLake and services business is starting to be better understood, how it's impacting margins. And I think they're getting a better handle on customers returning and starting to move back into purchasing cycles again. So as they come off the bottom, I think it was a really important thing that the company was able to provide some guidance going forward so investors could get a feel for what to expect over the next few quarters.

BRIAN SOZZI: Dan, you mentioned Cisco a moment ago. How concerned are you about how their next couple quarters were planned out? This is a company now getting ready to orchestrate really getting rid of thousands of employees at a time when theoretically, business should start to be recovering.

DANIEL NEWMAN: Just to be clear, Brian, you're asking about Cisco now?

BRIAN SOZZI: Cisco, correct. Cisco.

DANIEL NEWMAN: OK. Yeah, I mean, Cisco made a really strong pledge at the onset of the pandemic to hold steady with employees. And I think, frankly, we saw how the numbers came under pressure. Chuck Robbins held to that pledge.

But as we're seeing with companies that held over a period of time, there's only so long you can sustain and then continue to provide the type of returns to the Street that is expected. Chuck's in a challenging situation for Cisco. But the company has been very steady over the years. And I think the strategy has been sound.

And I'm still encouraged by it. I think we have a couple quarters that we're going to still see resistance. But I do think Q2 for HPE and the last quarter were the bottom for Cisco. I think we'll start to see it come-- start to bounce back up. And we're going to need to watch those returns.

But unfortunately, anytime layoffs are made, it's always a really unfortunate circumstance for any company. But I think Cisco was very strategic. I think the company made it an effort to keep its employees in place as long as possible. And hopefully, they'll start to add numbers back and add employees back as the business starts to rebound.

This was a really difficult circumstance. And, like I said, for these big OEMs, it wasn't the same as these big cloud companies. It's a different business. It was much more dependent upon volume of sales of cap ex goods and services that were largely put on hold when business and the economy were stopped for a couple of months earlier this year.

ALEXIS CHRISTOFOROUS: All right, Daniel Newman of Futurum Research, thanks for stopping by.

DANIEL NEWMAN: Thanks for having me.