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Hewlett Packard (HPE) Q1 Earnings Top; Down on Weak Guidance
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Hewlett Packard Enterprise Company (HPE - Free Report) reported better-than-expected bottom-line results for the first quarter of fiscal 2017, which also improved year over year. The company’s non-GAAP earnings of 45 cents per share came a penny ahead of the Zacks Consensus Estimate and were toward the high-end of the guided range of 42–46 cents (mid-point: 44 cents). Also, it improved 9.8% on a year-over-year basis.
On a GAAP basis, the company reported earnings of 16 cents, a penny higher than the year-ago quarter. Also, it was way above the guided range of 3 cents to 7 cents (mid-point: 5 cents).
Hewlett Packard Enterprise Company Price, Consensus and EPS Surprise
Hewlett Packard Enterprise reported total revenue of $11.407 billion, lagging the Zacks Consensus Estimate of $12.132 billion and down 10.4% year over year. The year-over-year decline was mainly due to heightened pressure from commodities pricing, unfavorable exchange rates, soft market condition and some execution issues. Adjusted for currency exchange rates and divestures, the company’s revenues were down just 4% year over year. Unfavorable currency exchange rates negatively impacted revenues by 140 basis points (bps).
During the quarter, the company witnessed uneven global demand across all regions. In the U.S., sales were impacted by tough market conditions particularly for Servers and Storage products. Europe’s contribution remained weak while Asia-Pacific and Japan (APJ) registered mixed demand with encouraging performance in Japan that was more than offset by dismal performance in the rest of Asia.
Segment-wise, revenues at the Enterprise Group were down 12% from the year-ago quarter to $6.3 billion. However, adjusting for divestures and currency, segment revenues were down 6%. Revenues from Servers, Storage, Networking and Technology Services were down 12%, 13%, 33% and 2%, respectively.
Enterprise Services revenues were down 11% to $4 billion. Adjusted for divestures and currency, the segment’s revenues declined 6%. Revenues were hurt by a 17% decline in Application and Business Services and an 8% drop in IT Outsourcing.
Software revenues were down 8% to $721 million. Adjusted for divestures and currency, the segment’s revenues were flat when compared with the year-ago quarter. Revenues from License, Support and Professional Services were down 9%, 9% and 7%, respectively. SaaS revenues, however, grew 4% year over year.
Financial Services revenues were up 6% to $823 million. The segment’s net portfolio went up 2% while financing volume plunged 10% year over year.
Operating Results
Hewlett Packard Enterprise’s gross margin expanded 50 basis points (bps) on a year-over-year basis to 28.9%. The year-over-year gross margin expansion was mainly driven by continued progress on the offshore labor mix of Enterprise Services.
Moreover, the company’s non-GAAP operating margin expanded 110 bps to 9.2% mainly due to a higher gross margin and decline in non-GAAP operating expenses as a percentage of revenues.
Balance Sheet and Cash Flow
Hewlett Packard Enterprise ended the first quarter with $9.86 billion in cash and cash equivalents, significantly down from $12.987 billion at the end of the previous quarter. Long-term debt during the quarter was $12.270 billion, compared with $12.608 billion last quarter.
During the quarter, Hewlett Packard Enterprise used $1.46 billion of cash flow for operational activities. However, it generated $200 million of free cash flow.
Moreover, during the quarter, the company returned $750 million to its shareholders, of which $641 million was through share repurchases and the remaining through dividend payments.
Guidance
The company revealed that three major headwinds, heightened pressure from unfavorable currency exchange movements, increased commodities pricing and some near-term execution issues, have developed since it issued it initially provided outlook for 2017 at its Securities Analyst Meeting in Oct 2016. Citing these near-term challenges, Hewlett Packard Enterprise has lowered its earnings outlook for fiscal 2017.
The company now expects non-GAAP earnings per share in a range of $1.88 to $1.98 (mid-point $1.93), down from $2.00–$2.10 (mid-point: $2.05) projected earlier. The Zacks Consensus Estimate is pegged way higher at $2.05. GAAP earnings projection was also lowered to 60 cents – 70 cents from the previous projected range of 72 cents – 82 cents.
The company also provided disappointing earnings guidance for second-quarter fiscal 2017. Hewlett Packard Enterprise expects non-GAAP earnings per share in a range of 41–45 cents (mid-point: 43 cents), which is lower than the Zacks Consensus Estimate of 47 cents. On a GAAP basis, the company guides the bottom line to be in a range of a loss of 3 cents to earnings of a penny.
The company did not provided any update on earnings outlook for post splits and divestitures as well as free cash flow. Notably, during its fourth-quarter fiscal 2016 results, the company had provided earnings outlook for post splits and divestitures. The company anticipates fiscal 2017 non-GAAP earnings to come in a range of $1.25 to $1.35 for the future HPE while reported earnings should be between $1.45 and $1.55.
Moreover, Hewlett Packard Enterprise anticipates free cash flow for the combined HPE to be $3.6 billion to $3.9 billion, while the future company will generate $2.1 billion to $2.4 billion in fiscal 2017.
Our Take
Although Hewlett Packard Enterprise reported better-than-expected bottom-line results for first-quarter fiscal 2017, we are disappointed by its dismal top-line performance. Not only did it fall short of our estimates but also declined significantly on a year-over-year basis. Notably, this was the third consecutive quarter when the company’s revenues have fallen short of our estimates.
The three major challenges cited by the company are likely to affect its overall performance in the near term as well, owing to which the company lowered its fiscal 2017 earnings outlook.
The dismal first quarter top-line performance along with lowered fiscal 2017 outlook raises concerns over its future prospects among investors. As a result, shares of Hewlett Packard Enterprise fell approximately 6.5% in yesterday’s after-hour trading session.
Notably, shares of Hewlett Packard Enterprise have underperformed the Zacks categorized Computer-Integrated Systems industry in the year-to-date period. The industry has gained 9.1% in the said time frame while the stock returned 0.1%.
Nonetheless, as the challenges are short lived, we are optimistic about its ongoing restructuring initiatives that will drive growth over the long run.
Notably, since its split from HP Inc. (HPQ - Free Report) in Nov 2015, Hewlett Packard Enterprise’s president and 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 our opinion, although the company is still struggling to determine its true business focus, its turnaround strategies, which include trimming down businesses, lowering costs through job cuts and making some strategic acquisitions, are in the right direction.
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 in the long run.
However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (IBM - Free Report) and Oracle (ORCL - Free Report) adds to its woes.
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Hewlett Packard (HPE) Q1 Earnings Top; Down on Weak Guidance
Hewlett Packard Enterprise Company (HPE - Free Report) reported better-than-expected bottom-line results for the first quarter of fiscal 2017, which also improved year over year. The company’s non-GAAP earnings of 45 cents per share came a penny ahead of the Zacks Consensus Estimate and were toward the high-end of the guided range of 42–46 cents (mid-point: 44 cents). Also, it improved 9.8% on a year-over-year basis.
On a GAAP basis, the company reported earnings of 16 cents, a penny higher than the year-ago quarter. Also, it was way above the guided range of 3 cents to 7 cents (mid-point: 5 cents).
Hewlett Packard Enterprise Company Price, Consensus and EPS Surprise
Hewlett Packard Enterprise Company Price, Consensus and EPS Surprise | Hewlett Packard Enterprise Company Quote
Quarter in Detail
Revenues
Hewlett Packard Enterprise reported total revenue of $11.407 billion, lagging the Zacks Consensus Estimate of $12.132 billion and down 10.4% year over year. The year-over-year decline was mainly due to heightened pressure from commodities pricing, unfavorable exchange rates, soft market condition and some execution issues. Adjusted for currency exchange rates and divestures, the company’s revenues were down just 4% year over year. Unfavorable currency exchange rates negatively impacted revenues by 140 basis points (bps).
During the quarter, the company witnessed uneven global demand across all regions. In the U.S., sales were impacted by tough market conditions particularly for Servers and Storage products. Europe’s contribution remained weak while Asia-Pacific and Japan (APJ) registered mixed demand with encouraging performance in Japan that was more than offset by dismal performance in the rest of Asia.
Segment-wise, revenues at the Enterprise Group were down 12% from the year-ago quarter to $6.3 billion. However, adjusting for divestures and currency, segment revenues were down 6%. Revenues from Servers, Storage, Networking and Technology Services were down 12%, 13%, 33% and 2%, respectively.
Enterprise Services revenues were down 11% to $4 billion. Adjusted for divestures and currency, the segment’s revenues declined 6%. Revenues were hurt by a 17% decline in Application and Business Services and an 8% drop in IT Outsourcing.
Software revenues were down 8% to $721 million. Adjusted for divestures and currency, the segment’s revenues were flat when compared with the year-ago quarter. Revenues from License, Support and Professional Services were down 9%, 9% and 7%, respectively. SaaS revenues, however, grew 4% year over year.
Financial Services revenues were up 6% to $823 million. The segment’s net portfolio went up 2% while financing volume plunged 10% year over year.
Operating Results
Hewlett Packard Enterprise’s gross margin expanded 50 basis points (bps) on a year-over-year basis to 28.9%. The year-over-year gross margin expansion was mainly driven by continued progress on the offshore labor mix of Enterprise Services.
Moreover, the company’s non-GAAP operating margin expanded 110 bps to 9.2% mainly due to a higher gross margin and decline in non-GAAP operating expenses as a percentage of revenues.
Balance Sheet and Cash Flow
Hewlett Packard Enterprise ended the first quarter with $9.86 billion in cash and cash equivalents, significantly down from $12.987 billion at the end of the previous quarter. Long-term debt during the quarter was $12.270 billion, compared with $12.608 billion last quarter.
During the quarter, Hewlett Packard Enterprise used $1.46 billion of cash flow for operational activities. However, it generated $200 million of free cash flow.
Moreover, during the quarter, the company returned $750 million to its shareholders, of which $641 million was through share repurchases and the remaining through dividend payments.
Guidance
The company revealed that three major headwinds, heightened pressure from unfavorable currency exchange movements, increased commodities pricing and some near-term execution issues, have developed since it issued it initially provided outlook for 2017 at its Securities Analyst Meeting in Oct 2016. Citing these near-term challenges, Hewlett Packard Enterprise has lowered its earnings outlook for fiscal 2017.
The company now expects non-GAAP earnings per share in a range of $1.88 to $1.98 (mid-point $1.93), down from $2.00–$2.10 (mid-point: $2.05) projected earlier. The Zacks Consensus Estimate is pegged way higher at $2.05. GAAP earnings projection was also lowered to 60 cents – 70 cents from the previous projected range of 72 cents – 82 cents.
The company also provided disappointing earnings guidance for second-quarter fiscal 2017. Hewlett Packard Enterprise expects non-GAAP earnings per share in a range of 41–45 cents (mid-point: 43 cents), which is lower than the Zacks Consensus Estimate of 47 cents. On a GAAP basis, the company guides the bottom line to be in a range of a loss of 3 cents to earnings of a penny.
The company did not provided any update on earnings outlook for post splits and divestitures as well as free cash flow. Notably, during its fourth-quarter fiscal 2016 results, the company had provided earnings outlook for post splits and divestitures. The company anticipates fiscal 2017 non-GAAP earnings to come in a range of $1.25 to $1.35 for the future HPE while reported earnings should be between $1.45 and $1.55.
Moreover, Hewlett Packard Enterprise anticipates free cash flow for the combined HPE to be $3.6 billion to $3.9 billion, while the future company will generate $2.1 billion to $2.4 billion in fiscal 2017.
Our Take
Although Hewlett Packard Enterprise reported better-than-expected bottom-line results for first-quarter fiscal 2017, we are disappointed by its dismal top-line performance. Not only did it fall short of our estimates but also declined significantly on a year-over-year basis. Notably, this was the third consecutive quarter when the company’s revenues have fallen short of our estimates.
The three major challenges cited by the company are likely to affect its overall performance in the near term as well, owing to which the company lowered its fiscal 2017 earnings outlook.
The dismal first quarter top-line performance along with lowered fiscal 2017 outlook raises concerns over its future prospects among investors. As a result, shares of Hewlett Packard Enterprise fell approximately 6.5% in yesterday’s after-hour trading session.
Notably, shares of Hewlett Packard Enterprise have underperformed the Zacks categorized Computer-Integrated Systems industry in the year-to-date period. The industry has gained 9.1% in the said time frame while the stock returned 0.1%.
Nonetheless, as the challenges are short lived, we are optimistic about its ongoing restructuring initiatives that will drive growth over the long run.
Notably, since its split from HP Inc. (HPQ - Free Report) in Nov 2015, Hewlett Packard Enterprise’s president and 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 our opinion, although the company is still struggling to determine its true business focus, its turnaround strategies, which include trimming down businesses, lowering costs through job cuts and making some strategic acquisitions, are in the right direction.
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 in the long run.
However, macroeconomic challenges and tepid IT spending remain near-term concerns. Competition from International Business Machines (IBM - Free Report) and Oracle (ORCL - Free Report) adds 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.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>