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Hewlett Packard (HPE) Q4 Earnings In Line, Revenues Lag

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Hewlett Packard Enterprise Company (HPE - Free Report) reported modest results for the fourth quarter of fiscal 2016 wherein its bottom line matched the Zacks Consensus Estimate but the top line missed the same. While the company’s non-GAAP earnings marked a year-over-year improvement, revenues declined.

It should be noted that at the end of the fourth quarter on Oct 31, the company completed one year of operation following the split from its parent Hewlett-Packard Company.

Prior to the split, Hewlett-Packard Company was a leading global provider of computing products, technologies, software and services to individual consumers, SMBs and large enterprises, including those operating in the public and educational sectors. Products like PCs and access devices, imaging and printing-related products and services, enterprise IT infrastructure, and multi-vendor customer services including support, maintenance, consulting, integration and outsourcing comprised its offerings.

Now Hewlett-Packard Company’s PC and printer business operates under the name HP Inc. (HPQ - Free Report) , while Hewlett Packard Enterprise offers commercial tech products.

Quarter in Detail

Revenues

Hewlett Packard Enterprise reported total revenue of $12.478 billion, lagging the Zacks Consensus Estimate of $12.859 billion and down 7.2% year over year. The year-over-year decline was mainly due to weak performance in Europe, particularly in the UK. Unfavorable currency exchange rates negatively impacted revenues by 110 basis points (bps).

Segment-wise, revenues at the Enterprise Group were down 9% from the year-ago quarter to $6.7 billion. However, adjusting for divestures and currency, segment revenues were down 3%. Revenues from Servers, Storage, Networking and Technology Services were down 7%, 5%, 34% and 4%, respectively.

Enterprise Services revenues were down 6% to $4.7 billion. Revenues were hurt by a 3% decline in Application and Business Services and a 7% drop in IT Outsourcing. Adjusted for divestures and currency, the segment’s revenues declined 2%.

Software revenues were down 18% to $903 million. Revenues from License, Support, Professional Services and SaaS were down 5%, 7%, 7% and 1%, respectively. Adjusted for divestures and currency, the segment’s revenues were flat when compared with the year-ago quarter.

Financial Services revenues were up 2% to $814 million.

Operating Results

Hewlett Packard Enterprise’s non-GAAP gross margin expanded 80 basis points (bps) on a year-over-year basis to 30.4%. Moreover, the company’s non-GAAP operating margin expanded 150 bps to 11.1% mainly due to a higher gross margin and decline in operating expenses as a percentage of revenues.

Non-GAAP net income came in at $1.035 billion or 61 cents per share, compared with $1.004 billion or 55 cents per share reported a year ago. Non-GAAP earnings were in line with the Zacks Consensus Estimate and were within the guided range of 58–63 cents (mid-point: 60.5 cents).

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Balance Sheet and Cash Flow

Hewlett Packard Enterprise ended the fourth quarter with $12.987 billion in cash and cash equivalents, compared with $10.743 billion at the end of the previous quarter. Long-term debt during the quarter was $12.608 billion compared with $15.354 billion last quarter.

Hewlett Packard Enterprise generated cash flow of $2.2 billion from operational activities during the fourth quarter and $5 billion in fiscal 2016. During the fourth quarter, the company generated free cash flow of $1.5 billion while the same for the fiscal was $2.1 billion, way above the company’s expectation of $1.7 billion to $1.9 billion.

Moreover, during fiscal 2016, the company returned $3 billion to its shareholders, of which $2.7 billion was through share repurchase and the remaining through dividend payments.

Guidance

Hewlett Packard Enterprise provided earnings guidance for the first quarter and fiscal 2017. The company expects non-GAAP earnings per share in a range of $2.00–$2.10 (mid-point: $2.05). The Zacks Consensus Estimate is pegged lower at $1.94. GAAP earnings are anticipated to come between 72 cents and 82 cents.

The company also provided earnings outlook for future HPE (post spin off and divestitures). The company anticipates fiscal 2017 non-GAAP earnings to come in the range of $1.25 to $1.35 for future HPE while reported earnings should be between $1.45 and $1.55.

Hewlett Packard Enterprise anticipates free cash flow for the combined HPE to be $3.6 billion to $3.9 billion, while the future company would generate $2.1 billion to $2.4 billion in fiscal 2017.

For first-quarter fiscal 2017, the company expects GAAP earnings per share in the range of 3 cents to 7 cents (mid-point: 5 cents) and non-GAAP earnings of 42–46 cents (mid-point: 44 cents). The Zacks Consensus Estimate is currently pegged at 47 cents.

Our Take

Hewlett Packard Enterprise reported modest fourth-quarter fiscal 2016 results, wherein earnings came in-line with the Zacks Consensus Estimate and increased on a year-over-year basis. On the other hand, revenues lagged our expectations and were also down from the year-ago figure.

Nonetheless, in our opinion, Hewlett-Packard Company’s initiative to split the business is already reaping benefits for Hewlett Packard Enterprise. We believe that the decision enabled a customized approach for two different kinds of businesses, which might not have been possible as a single entity.

Hewlett Packard Enterprise has done considerably well in the enterprise class server and storage markets. The company concentrates its resources on the high-margin software and security markets as well. We believe that the company’s traction in the cloud, security and Big Data segments will enhance its growth trajectory, going forward.

Furthermore, Hewlett Packard Enterprise’s strategic divestments and initiatives to return value to shareholders in the form of dividend and share repurchases bode well.

Since the split, Hewlett Packard Enterprise’s Chief Operating Officer (CEO), Meg Whitman, has been looking to reduce the company’s large portfolio of non-core businesses that are now struggling to maintain their growth trajectory.

In keeping with this effort, the company, in September this year, announced that it will spin off the software business and merge the same with British software firm, Micro Focus International Plc, in a cash-stock deal worth $8.8 billion.

The transaction, which is subject to certain regulatory approvals, is anticipated to be tax free for the company. Per the agreement, the company will receive $2.5 billion in cash and a 50.1% stake in the merged entity, which is currently estimated to be worth $6.3 billion.

Also, Hewlett Packard Enterprise completed the sale of 84% of its 60.5% equity stake in Mphasis Limited, an IT service provider in Bangalore, India, to The Blackstone Group in September. The transaction has fetched the company around $700 million.

Furthermore, this May, it announced the spin-off of its struggling IT services segment – Enterprise Services – and entered into an agreement to merge the same with Computer Sciences Corporation .

The primary motive behind such a massive restructuring drive is to reassure investors of the company’s sustained focus on improving profitability and returning value to shareholders in the form of dividend and share repurchases.

We believe that Hewlett Packard Enterprise’s ongoing business overhaul will yield long-term benefits by supporting innovation and leading to cost savings.

We also believe that successful deployment of the company’s products will boost its top line, going forward.

However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (IBM - Free Report) and Oracle add to its woes.

Currently, Hewlett Packard Enterprise carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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