Hewlett-Packard Enterprise Earnings: Revenues Grow on a Constant Currency Basis As Company Highlights Innovation

Hewlett Packard  Enterprise (NASDAQ: HPE) is comprised of the former HP’s Enterprise group (servers, storage, and networking), its software business, HP Services,  and the Financial Services business.  The company announced results for its first fiscal quarter and the results were in line with our expectation. (Fiscal years end with October.) The company reported that its revenues increased by 4% on a constant currency basis (down 3% as reported) to $12.7 billion in the first quarter. While revenues for enterprise group and financial services grew in constant currency, revenues for enterprise services and software declined despite a minor improvement in performance metrics such as the number of contracts signed. Acknowledging its first quarter as a separate company, management highlighted a range of new products across its businesses that demonstrate its innovation and strengthening market position.  In this note, we review the results in detail.

We are in the process of updating our financial model to reflect the change in business operations (split of company into HPQ and HPE) based on the financial statements of the standalone entities.

See our full analysis on HP

Outlook for  Q2 And 2016

For Q2 FY2016, HPE estimates non-GAAP diluted net EPS to be in the range of $0.39 to $0.43 and GAAP diluted net EPS to be in the range of $0.13 to $0.17. The company stated that this EPS estimate the non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.26 per share, related to restructuring charges, the amortization of intangible assets, separation costs and acquisition and other related charges.

For FY2016, Hewlett Packard Enterprise estimates non-GAAP diluted net EPS to be in the range of $1.85 to $1.95 and GAAP diluted net EPS to be in the range of $0.75 to $0.85. Furthermore, the non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.10 per share, related to restructuring charges, the amortization of intangible assets, separation costs, acquisition and other related charges and tax indemnification adjustments.

Enterprise Group Revenue

During the quarter, Enterprise group revenues increased up 7% in constant currency basis (down 1% as reported) to $7.1 billion.  Within this division:

• Server revenue grew 5% on a  constant currency basis (down 1% as reported). The company said that its high-performance computing business is now running at an excess of a $1 billion run rate. It is also witnessing strong double-digit growth in mission-critical x86 servers. While the company will not chase growth at the cost of price, it sees significant opportunities in the Internet of Things, as well as mission-critical and high performance computing. Furthermore, it announced a slew of server products that will be launched in the coming months. These include a new market-changing hyper-converged offering based on a ProLiant virtualization server, as well as a refresh of the server portfolio to include a new technology called Persistent Memory.
• Storage revenue was up 3% in constant currency. Converged storage grew 17% year over year in constant currency, and contributes 56% to overall storage revenue. The company had record revenue for 3PAR, driven by triple-digit constant currency growth in all-flash, which grew at three times the market rates. The company also expects to gain share for the ninth quarter in a row.
• Networking revenue grew 54% as reported and was up 62% in constant currency. The business reported expanded operating margins, driven by the acquisition of Aruba and strong execution across all regions. When adjusted for Aruba, Networking revenue was still up double digits in constant currency. Given the strong product offering from Aruba in wireless, the company expects this growth in revenue  to continue over the next few quarters.
• Technology Services revenue declined 9% as reported (down 3% in constant currency) as the closure of deal with Tsinghua impacted new signings in China.

Enterprise Services Division

Enterprise services division consists of infrastructure technology outsourcing and application business services (ABS). Enterprise Services revenue was $4.7 billion, down 6% year over year (flat in constant currency), with a 5.1% operating margin. Infrastructure Technology Outsourcing revenue declined by 8% (down 2% in constant currency),  and Application and Business Services revenue declined by 3% (up 3% in constant currency)

Applications and Business Services, which is the higher margin business within ES, continued to improve with a second consecutive quarter of year-over-year revenue growth in constant currency. These results were driven by strong apps performance business process services. Furthermore, the infrastructure technology outsourcing revenue stabilized due to HPE synergy that offers  the next generation of infrastructure for the software-defined data center.

Strategic Enterprise Services revenue was up double digits year-on-year, with strong growth in Helion Managed Cloud driven by strong renewals.

Software Division

HP’s software division is in transition as the company continues to shift in its portfolio and operating model to SaaS and subscription-based offerings. This transition was reflected in the results as software revenue declined by 10% year over year (down 6% in constant currency)  to $780 million, with a 17.4% operating margin.  Within this segment:

• License revenue decreased 6% as reported and was down 2% in constant currency
• Support revenue decreased 13% and was down 9% in constant currency
• Professional services revenue was down 7% as reported and decreased 2% in constant currency
• Software-as-a-service (SaaS) revenue decreased 9% as reported and down 7% in constant currency

The primary reason for the decline in software revenue was the divestiture of several Software businesses that were not core to HPE’s strategy. This divestures include iManage, LiveVault and TippingPoint, which is expected to close later this month.  However, in line with our expectation, big data was strong with revenue up double-digits when normalized for currency and divestitures, driven by triple-digit growth in HPE Vertica licenses.

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