HPE Earnings: Challenging Business Environment Continues To Plague Revenue Growth

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Hewlett-Packard Enterprise (NYSE:HPE) announced its fiscal Q2 results on Thursday, May 31. The results were in line with our expectations, as the company’s revenues declined by 13% year-on-year (5% decline after adjusting for the effects of divestitures and currency) to $7.45 billion. All its operating segments, with the exception of financial services, reported double-digit declines in revenues. While the enterprise group, which includes server, storage, networking, and technology services, reported a 13% (7% in constant currency) decline in revenues to $6.2 billion, software revenues declined by 11% (9% y-o-y) to $685 million.

HPE’s management said that it continued to face a challenging business environment which included unfavorable foreign exchange movements, stiff competition, and industry-wide commodity constraints. Below we provide an overview of the key takeaways from the company’s earnings release.

For precise figures, please refer to our full analysis for Hewlett Packard Enterprise

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Decline in Server & Storage Revenues Continues

The Server and Storage division makes up nearly 24% of HPE’s value, according to our estimates. Server revenue declined by 14% year over year (14% in CC) to $2.99 billion. The revenues declined due to a shift in company strategy to focus on the critical, higher-margin, higher-growth areas of the server portfolio and de-emphasizing tier 1 server sales, which are facing pressure due to intense competition from white-box servers that are manufactured to design by low-cost ODMs. HPE plans to stabilize its share in the server market through new product launches for its core server product and expanding its portfolio through strategic acquisitions.

Storage revenue declined by 13% year-on-year (13% in CC) to $699 million as the contraction in the legacy portfolio continued during the quarter. Additionally, results were also meaningfully impacted by SSD supply constraints that are expected to lessen as the year progresses.

Revenue For Technology Services Improves

According to our estimates, the Technology Services (TS) division makes up nearly 12% of HPE’s value. This division, which includes virtualization, cloud deployment, and security services, reported a 3% quarter-over-quarter (3% in CC) growth in revenues to $1.97 billion. Orders also grew year-over-year for the fourth consecutive quarter for TS, which will help the division post growth throughout fiscal 2017.

Software Revenues Decline

The Software division is HPE’s third-largest vertical and makes up nearly 7% of HPE’s value, according to our estimates. Software revenue declined by 11% year-over-year (9% in constant currency) to $685 million. The company continues to focus on disciplined cost controls and, as a result, the operating margin improved 160 basis points to 26.4% during the quarter.

Within this segment, license revenue declined by 29%, support revenue declined by 4%, professional services revenue declined by 17% and software-as-a-service (SaaS) revenue grew by 3%.

Aruba Wireless Offsets The Decline In Networking Revenues

The networking division accounts for 4.5% of HPE’s estimated value, according to our estimates. Revenues for the division declined by 30%. However, 14% growth in Aruba Wireless revenues and some market share gains helped the company to offset the decline in legacy network installation.

Financial Services Reports Growth Once More

HPE Financial Services revenue grew 11%, its fourth consecutive quarter of year-over-year growth driven by one-time lease conversions and an increase in operating lease mix. However, operating profit declined 40 basis points year-over-year to 8.9%, primarily due to increased operating lease mix.

 Outlook For Q3 And 2017

For the third quarter of fiscal 2017, Hewlett-Packard Enterprise estimates that its GAAP diluted net EPS will be in the range of ($0.02) to $0.02 and non-GAAP diluted net EPS to be in the range of $0.24 to $0.28. Third quarter fiscal 2017 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $0.26 per share, related primarily to separation costs, restructuring charges and amortization of intangible assets.

For fiscal 2017, Hewlett-Packard Enterprise estimates GAAP diluted net EPS to be in the range of $0.03 to $0.07 and non-GAAP diluted net EPS to be in the range of $1.46 to $1.56. Fiscal 2017 non-GAAP diluted net EPS estimates exclude after-tax costs of approximately $1.49 per share, related primarily to tax valuation allowances and divestiture taxes, separation costs, restructuring charges and amortization of intangible assets.

We have an $18 price estimate for HPE’s stock, which is slightly below the current stock price.

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