HPE Earnings: Stock Fell, Revenues Missed Estimates

Hewlett Packard Enterprise (HPE) posted mixed earnings results in the fourth quarter after the market bell on Monday. The stock fell 4.53% in after-hours trading. The company missed its revenue estimates in the fourth quarter. Hewlett Packard beat its earnings estimates and maintained its earnings expectations for fiscal 2019.

HPE stock fell after Q4 earnings results

Hewlett Packard Enterprise stock was 1.93% higher on Monday and closed the trading day at $17.45. At Monday’s closing price, HPE has a market capitalization of around $22.8 billion. The stock is 0.8% lower than the 52-week high of $17.59 and 144.3% higher than the 52-week low of $12.09.

The stock has also gained more than 35% on a YTD (year-to-date) basis. In comparison, the S&P 500 has gained 25%. Cisco Systems (CSCO) and HP (HPQ) have gained 7.9% and 1%, respectively. Juniper (JNPR) and Nokia (NOK) have fallen 1.7% and 39.1%, respectively, YTD.

Earnings gained from margins and buybacks

HPE posted an adjusted EPS of $0.49 in the fourth quarter. The number beat analysts’ expectations of $0.46 per share. The earnings also beat the company’s expected range of $0.43–$0.47 per share. The third-quarter earnings also grew around 14% YoY (year-over-year). Amid a decline in the top line, we think that the company’s YoY earnings growth came from higher gross margins and share buybacks.

Hewlett Packard Enterprise’s gross margin was 260 basis points higher to 33.3% in the fourth quarter. The operating margin was flat at around 10% during the quarter. The company wants to improve its margins. HPE has made certain structural changes to boost its margins. An improved product mix and cost of sales efficiencies are also helping the company’s margins.

In the fourth quarter, Hewlett Packard Enterprise returned $431 million worth to shareholders in the form of dividends and share buybacks. While the company paid $147 million in dividends, $284 million worth of shares were repurchased during the quarter. In fiscal 2019, the company returned $2.9 billion to its shareholders.

HPE’s revenues fell

HPE’s revenues reached $7.22 billion in the fourth quarter. The company’s revenues were stable at $7.2 billion in the past three consecutive quarters. However, in the fourth quarter, the revenues missed analysts’ estimates of $7.40 billion and fell 9% YoY. Notably, the company posted YoY revenue declines for the past four quarters. Excluding currency and Tier 1 server sales, Hewlett Packard Enterprise’s revenues fell 7% YoY in the fourth quarter. The revenues declined due to lower sales from the Hybrid IT business, especially compute revenues. We noted that the Hybrid IT segment contributes a significant portion to the company’s total revenues.

The Hybrid IT segment reported a sales decline of around 11% YoY in the fourth quarter. The segment’s sales of $5.67 billion were also lower than analysts’ expectations of $5.74 billion. Compute revenues, which include server sales and add nearly 45% to the total revenues, fell 13% YoY. Storage revenues also fell 12% YoY in the fourth quarter. The other two revenue segments, Intelligent Edge and Financial Services, posted revenues of $723 million and $878 million, respectively, in the quarter.

According to Hewlett Packard Enterprise CEO Antonio Neri, the company is still witnessing longer sales cycles, particularly for bigger deals. Neri also cited trade war fears and global uncertainty as reasons for revenue declines, according to an interview with CNBC on Monday. He said that “the deflationary side of the commodities” pressured the fourth-quarter results.

Earnings outlook for fiscal 2020

Hewlett Packard Enterprise expects its adjusted EPS to be $0.42–$0.46 in the first quarter of fiscal 2020. Notably, the mid-point of the first-quarter guidance was higher than the levels the previous year but lower than the previous quarter. Analysts expect earnings of $0.43 for the first quarter—up 2.93% YoY. Analysts expect sales to fall 3.6% to $7.3 billion in the first quarter.

For fiscal 2020, the company expects its adjusted EPS to be $1.78–$1.94. Analysts expect the earnings to grow 4.84% YoY to $1.86 for fiscal 2020. They also expect the sales to improve 0.64% YoY to $29.3 billion for fiscal 2020.

For fiscal 2020, HPE maintains a free cash flow guidance range of $1.9 billion–$2.1 billion. The mid-point of the free cash flow forecast for fiscal 2020 was around 17.6% higher than the previous year.

During the quarter, the company has made significant research and development and sales investments in its Intelligent Edge segment. HPE expects the investments to lead to profitability and yield revenues in fiscal 2020. According to the earnings transcript, the company expects the revenues to grow in fiscal 2020, excluding currency headwinds.

Acquisition details

During the quarter, HPE announced the acquisition of data start-up MapR’s business assets.

In the fourth quarter, Hewlett Packard Enterprise also completed the acquisition of supercomputer manufacturer Cray in September. The acquisition was announced in May. The deal will likely benefit HPE in fiscal 2020 and beyond. We noted that the addition of Cray would help expand HPE’s presence in federal business and academia. Cray will likely provide integrated solutions and supercomputing products to fulfill Hewlett Packard Enterprise customers’ data-intensive needs.

Peer comparison

Nokia also missed the revenue estimates in the third quarter. The company lowered its revenue guidance for 2019. Juniper beat the third-quarter earnings expectations but gave a lower-than-expected revenue outlook for 2019. Cisco Systems also posted better-than-expected earnings and revenue estimates in the second quarter. The company beat the profit and revenue estimates in the first quarter of fiscal 2020 ending in October. However, Cisco gave a disappointing second-quarter outlook. HP, another software company, will report its earnings results on November 26 after the market bell.

Analysts’ recommendations for HPE

Overall, analysts favor a “hold” rating on HPE. Among the 23 analysts that cover Hewlett Packard Enterprise, 26% give it a “buy” rating, 13% gave it a “sell” rating, and 61% give it a “hold” rating. Analysts expect a 12-month target price of $17.26. The target price shows that HPE stock is trading at a premium of 1.1% over analysts’ average estimates.