HPE Earnings: Decline In Revenues Continues

Hewlett-Packard Enterprise (NYSE:HPE) announced its fiscal Q4 results on Tuesday, November 22nd. (Fiscal years end with October.) The results were in line with our expectations as revenues declined by 7% year over year (2% in constant currency) to $12.47 billion. All its operationg segments, barring financial services, reported mid- to high single digit declines in revenues. The highlights of the earnings announcement is as follows:

Decline in Enterprise Group Revenues Continues

Enterprise Group revenue declined by 9% year over year (3% in constant currency). The revenues declined due to a shift in company’s strategy to focus on profit rather than market share. As a result, server revenue declined 6% to $3.52 billion. The growth in high-performance and mission critical computing was offset by pressure in the core servers and service provider verticals, which is facing intense competition from white-box servers that are manufactured to design by Asian ODMs. Nevertheless, the company has launched the Synergy line of servers to compete in the Blade segment and the company anticipates taking back share as this product line ramps.

Storage revenue declined by 3% to $779 million as a contraction in the legacy portfolio continued during the quarter. However, the higher-margin converged storage portfolio was up 1% and it’s now 56% of the total storage mix. Traditional storage declined by 11%, particularly challenged by weakness in entry-level storage. 3PAR solutions, which caters to small and medium sized companies, continued to report growth as 3PAR plus XP plus EVA was up 2% and all-flash 3PAR revenue grew nearly 100%.

For the networking division, revenue was flat. However, a 13% growth in Aruba’s revenues and some gain in marketshare helped the company to offset decline in legacy network installation. The company expects the growth in Aruba to accelerate next quarter as some installations in the quarter pushed out into Q1 FY17. The technology services, which includes virtualization, cloud deployment and security, reported 2% quarter-over-quarter growth in revenues to $1.78 billion.

A culmination of aforementioned factors in the underlying industries resulted in the company reporting a 9% decline (3% in constant currency ) in revenues to $6.68 billion during the quarter.

Profitability At Enterprise Services Improves Amidst Decline In Revenues

HPE’s Infrastructure Technology Outsourcing (ITO) and Application and Business Services (ABS) businesses have been under pressure as competition in the underlying industries has been relentless. As a result, the revenues for this segment declined by 6% (2% in CC) to $4.73 billion. Within this vertical, ITO declined by 7% to $2.84 billion and ABS revenues declined by 3% to $1.89 billion. However, its cost actions also delivered strong margin expansion. Profitability was up 250 basis points or 2.5% year over year to 10.7% for the quarter, the highest it’s been since the fourth quarter of 2009. However, the corrective steps taken by HPE to merge this business with CSC in the future should help the company to improve its cost matrix and realize better cash flows in the future. This transaction is expected to be completed by April 1st next year.

Software Revenues Decline

Software revenue declined by 6% year over year (flat in constant currency) to $903 million. Within this segment, license revenue declined by 5% (1% in constant currency), support revenue declined by 7% (1% in constant currency), professional services revenue was declined by 7% (4% in constant currency)  and software-as-a-service (SaaS) revenue declined by 1%( up 11% in constant currency). However, the renewal rate for high-margin support contracts improved 300 basis points year-over-year to over 90%. The company continues to focus on disciplined cost controls and, as a result, the operating margin improved 220 basis points to 32.1% during the quarter.

In September, the company announced that it was spinning-off and merging its non-core software assets into Britain’s Micro Focus International Plc (MCRO.L) as HPE’s software revenues have witnessed double-digit decline. The company expects this deal to close by August 31st next year.

We are in the process of updating our HPE model. At present, we have a $22.29 price estimate for the stock, which is 2.5% lower than the current stock price.

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