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A Look at HPE’s Improving Profit Margins

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Nov. 28 2018, Updated 10:30 a.m. ET

Non-GAAP operating profit expected to rise 25% in fiscal 2018

We have seen that Hewlett Packard Enterprise (HPE) is expected to grow its revenue 6% with earnings growth of close to 60% in fiscal 2018. The company expects to post a non-generally accepted accounting principles operating profit of $2.7 billion, a rise of 25% year-over-year and higher than its earlier estimate of $2.6 billion.

HPE’s operating margin is expected to rise from 8.9% in fiscal 2018 to 9.4% in fiscal 2019 and 9.8% in fiscal 2020. The operating margins of its peers Cisco (CSCO), IBM (IBM), and Juniper (JNPR) are expected to be much higher at 31.7%, 18%, and 17.9%, respectively, in their current fiscal years.

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Component costs might affect profitability

HPE is likely to battle component cost dynamics, a competitive cost environment, and stranded costs to improve profitability in the short term. Further, acquisition costs could affect its profit margins in fiscal 2018.

Acquisitions and spin-off

HPE’s costs have also been driven by several spin-offs and acquisitions undertaken by the company over the last few years. HPE has gained traction via acquisitions, especially in the storage and networking verticals. The company is looking to improve its margins and right-size cost envelopes arising from acquisitions.

HPE Next

In 2017, HPE announced a three-year, $1.5 billion cost-savings program known as HPE Next. HPE achieved cost savings of $250 million in fiscal 2017. It previously had a heavy regional and global structure that has since been trimmed significantly.

HPE has focused on reducing platforms and stock keeping units to cut costs. It has reduced its product platform from 26 to ten. Its number of manufacturing locations has been reduced from 17 to ten in fiscal 2018 and could drop to seven by the end of fiscal 2019.

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