Hewlett Packard Enterprise Company (HPE - Free Report) , yesterday, reported encouraging third-quarter fiscal 2017 results, wherein the bottom line not only came ahead of its estimates but also surpassed the Zacks Consensus Estimate. Furthermore, the company recorded impressive year-over-year growth in revenues, which came ahead of the Zacks Consensus Estimate.
The company’s non-GAAP earnings of 31 cents per share beat the Zacks Consensus Estimate of 25 cents and also came ahead of management’s guidance range of 24-28 cents. However, the figure plunged 22.5% on a year-over-year basis.
On a GAAP basis, the company reported earnings of 15 cents from continuing operations, as against $1.43 reported in the year-ago quarter. However, it compared favorably with the guided range of a loss of 2 cents to earnings of 2 cents.
Per the company, the better-than-expected bottom-line performance was mainly “due to cost savings, software performance and favorable other income and expense.”
Notably, during second-quarter fiscal 2017, the company closed the spin-merger of its Enterprise Services business. Therefore, Hewlett Packard considers Enterprise Services as a discontinued operation since the fiscal second quarter, and the year-ago quarter’s results have also been adjusted accordingly.
In addition, the company completed the pending spin-merger of its Software business in the fiscal third quarter. However, in this quarter, results include the full business of this division.
Quarter in Detail
Hewlett Packard Enterprise reported revenues from continuing operations (which includes Enterprise Group, HPE Financial Services and Software businesses) of $8.209 billion, up 2.5% from the year-earlier quarter’s revenues of $8.005 billion. Quarterly revenues comfortably surpassed the Zacks Consensus Estimate of $7.566 billion.
The year-over-year growth was mainly driven by “better execution and a compelling portfolio”, which was partially offset by heightened commodities pricing pressure and unfavorable exchange rates. Adjusted for currency exchange rates and divestures, the company’s revenues from continuing operations were up 6% year over year.
During the fiscal third quarter, the company witnessed uneven global demand across all regions. In the United States, sales, excluding Tier 1 servers, grew on the back of elevated sales of core servers and strong growth in networking business. However, the storage business witnessed a soft performance. Europe made a turnaround this quarter, registering year-over-year growth, mainly attributed to strong performance in “Germany and broad stabilization across Western Europe.” Additionally, the Asia-Pacific and Japan (APJ) region recorded growth, with stellar performance in Japan, China and India.
Segment wise, revenues at the Enterprise Group were up 3% from the year-ago quarter to $6.8 billion. Adjusting for divestures and currency, segment revenues came in at 3%. While revenues from Servers were down 1%, Storage, Networking and Technology Services were up 11%, 16% and 1%, respectively.
Software revenues declined 3% to $718 million. Adjusted for divestures and currency, the segment’s revenues were down 2%, when compared with the prior-year quarter. Revenues from Support and Professional Services dropped 2% and 23%, respectively. License and SaaS revenues, however, grew 2% and 7% year over year, respectively.
Financial Services revenues were up 10% to $897 million. The segment’s net portfolio grew 2%, but financing volume dipped 8% year over year.
Hewlett Packard Enterprise’s gross margin contracted 340 basis points (bps) on a year-over-year basis to 33%. This year-over-year contraction was mainly due to competitive pricing, elevated DRAM pricing, unfavorable currency, as well as stranded costs and short-term dilution from the recent acquisitions.
Moreover, the company’s non-GAAP operating margin descended 150 bps to 8.4%, primarily due to a lower gross margin, which was partially offset by a decline in non-GAAP operating expenses as a percentage of revenues.
Balance Sheet and Cash Flow
Hewlett Packard Enterprise ended the fiscal third quarter with $7.8 billion in cash and cash equivalents, down from $8.1 billion recorded at the end of the previous quarter. Long-term debt at the quarter end was $14.527 billion compared with $11.904 billion recorded in the last quarter.
During the quarter, Hewlett Packard Enterprise generated $891 million of cash flow from operational activities. Free cash flow was $428 million. For the first three quarters of fiscal 2017, the company generated $63 million of cash flow for operational activities.
Additionally, during the reported quarter, the company returned $732 million to its shareholders, of which $625 million was through share repurchases and the remaining through dividend payments. During the first three quarters of fiscal 2017, Hewlett Packard Enterprise returned $2.259 billion to its shareholders, of which $1.936 billion was through share repurchases and the remaining through dividend payments.
The company issued a disappointing bottom-line guidance for fourth-quarter fiscal 2017. Hewlett Packard Enterprise expects non-GAAP earnings per share in the range of 26-30 cents (mid-point: 28 cents), which is lower than the Zacks Consensus Estimate of 41 cents. On a GAAP basis, the company guides the bottom line to be in a range of breakeven to earnings of 4 cents.
As the company completed its spin-merger of the Software business in the recently reported quarter, it adjusted the outlook for fiscal 2017. Hewlett Packard Enterprise now expects non-GAAP earnings per share for fiscal 2017 in the range of $1.36-$1.40 (mid-point $1.38), down from $1.46-$1.56 (mid-point $1.51). The Zacks Consensus Estimate is pegged at $1.46. On a GAAP basis, the company now projects the bottom line to be in the range of a loss of 7-11 cents. Earlier, the company’s guidance was in the range of a loss of 3 cents to earnings of 7 cents.
However, Hewlett Packard Enterprise estimates free cash flow to be negative $1.8 billion in fiscal 2017.
After two back-to-back quarters of dismal performance, Hewlett Packard Enterprises reported encouraging fiscal third-quarter results, which indicates that the company’s contrarian strategy is in the right direction.
The stock’s after-hour trade performance reflects that the better-than-expected quarterly results have reinstated investor’s optimism. Shares of Hewlett Packard Enterprise gained approximately 5% during yesterdays’ after-hour trading session.
Notably, although the entire industry, to which Hewlett Packard Enterprise belongs to, has been underperforming, the stock is among the worst performers. During the year-to-date period, the stock has lost 39.3% of its value, as compared with the industry’s loss of 19%.
During the conference call, the company’s chief executive — Meg Whitman — hinted that it will continue to look for “opportunity to create an internal structure and operating model that is simpler, nimbler and faster.” This indicates that we may see Hewlett Packard Enterprise becoming even smaller with spin offs, or acquiring assets to enhance its capabilities in the hybrid IT model.
Nonetheless, we remain slightly cautious about the company’s near-term prospects due to the three main challenges it is currently facing — heightened pressure from unfavorable currency exchange movements, elevated commodities pricing and some near-term execution issues. These headwinds are expected to thwart its overall performance in the near term.
Also, macroeconomic challenges and tepid IT spending remain other 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).
A better-ranked stock in the same industry is Iteris, Inc. (ITI - Free Report) , sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Iteris has long-term expected EPS growth rate of 10%.
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