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HP Enterprise (HPE) Down 5.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Hewlett Packard Enterprise (HPE - Free Report) . Shares have lost about 5.2% 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 the most recent earnings report in order to get a better handle on the important drivers.

Hewlett Packard Q2 Earnings & Revenues Miss Estimates

Hewlett Packard delivered second-quarter fiscal 2020 non-GAAP earnings of 22 cents per share, which missed the Zacks Consensus Estimate by 29%. The reported figure also came in lower than the year-ago number of 42 cents.

Revenues of $6 billion were down 16% from the prior-year quarter and 15% in constant currency, primarily due to supply chain constraints and delays in customer acceptance, which resulted in high levels of backlog, particularly in Compute, HPC & MCS, and Storage. The figure missed the Zacks Consensus Estimate by 7.2%.

Additionally, the company withdrew its third quarter and fiscal 2020 outlook due to coronavirus-led uncertainty.

Quarterly Details

Segment-wise, the company registered sales contraction across all its businesses. The Compute division’s sales decreased 19% year over year to $2.6 billion, thanks to component-supply disruptions.

Apart from the Compute segment, HPE registered sales declines across its Storage and Financial Services businesses. Revenues from Storage business fell 16% year on year to $1.1 billion. However, Nimble Services revenues grew 20% year over year, which was a breather. Financial Service revenues were down 5% year over year to $833 million.

Moreover, year-over-year revenue decline across the HPC & MCS, Intelligent Edge, and A&PS segments also added to the company’s woes. HPC & MCS revenues declined 18% year over year to $589 million. Revenues at the Intelligent Edge division fell 2% to $665 million during the quarter. A&PS division’s sales declined 8% year over year to $297 million.

Operating Results

Non-GAAP gross margin of 32% contracted 20 basis points (bps) on a year-over-year basis.

HPE’s non-GAAP operating profit fell 42.4% year over year to $365 million. Non-GAAP operating margin contracted 280 bps, year over year, to 6.1%, primarily due to high transformation costs.

Balance Sheet and Cash Flow

The company ended the fiscal second quarter with $5.13 billion in cash and cash equivalents compared with the $3.17 billion recorded at the end of first quarter.

During the reported period, Hewlett Packard Enterprise generated $100 million of cash from operational activities. Free cash flow was negative $402 million in the quarter.

Additionally, the company repurchased shares worth $151 million and paid out $154 million as dividends.

Moreover, the company also approved a cost optimization plan to be implemented through fiscal year 2022, including changes to the company’s workforce, real estate model and business process improvements. Hewlett Packard expects at least $1 billion in savings by fiscal year 2022-end. In order to achieve this level of cost savings, the company plans cash funding payments between $1 billion and $1.3 billion over the next three years.

How Have Estimates Been Moving Since Then?

Estimates revision followed a downward path over the past two months. The consensus estimate has shifted -21.02% due to these changes.

VGM Scores

At this time, HP Enterprise has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

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

Outlook

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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