HPE Earnings Preview: Challenging Business Environment Continues To Impact Revenue Growth

Hewlett-Packard Enterprise (NYSE:HPE) is set to release its fiscal Q3 2017 earnings on Tuesday, September 5. While the company continues to focus on high-end enterprise hardware and customer services in the long term, it continues to build its core portfolio of services for the hybrid cloud infrastructure to bolster its revenues. Despite these efforts, we expect that revenues will decline during the quarter. In this earnings release, we will continue to monitor the growth in its enterprise group revenues, which is composed of servers, storage and converged solutions.

 Outlook For Q3 And 2017

For the third quarter of fiscal 2017, HPE estimates that its GAAP diluted net EPS will be in the range of ($0.02) to $0.02 and non-GAAP diluted net EPS will 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.

Enterprise Group To Report Another Quarter Of Revenue Declines

According to Trefis estimates, the Server & Storage businesses, which make up the Enterprise Group vertical, account for close to 24% of HPE’s total valuation. While HPE continues to lead the enterprise server market, server revenues have declined in line with the overall decline in the server market. Although HPE continues to lead the industry, its share has declined to 24.2% in Q1 2017.

The decline in revenues was due to multiple factors such as a slowdown in hyper-scale data center growth and a decline in high-end server sales as clients wait for the launch of Intel’s new Skylake processors in H2 2017. Additionally, the decline in the branded server market has been accentuated by the rise in market share of white-box servers that are manufactured to design by low-cost Asian companies. We believe that this slowdown will be reflected in HPE’s shipments and revenues for Q3 FY17. Still, HPE has leveraged its technological leadership fairly well in defending its market position.

Storage division revenues are also reported under the Enterprise group umbrella. This division reported a decline in revenues in Q2 2017 as the contraction of the company’s legacy storage portfolio continued during the year. However, growth in revenues from 3PAR solutions, which caters to small and medium-sized businesses, has offset the decline in storage revenues to some extent. Despite the increase in revenues from hybrid storage, the business environment in storage remains challenging amidst consolidation. We believe that that HP’s external enterprise storage revenue will continue to decline in Q3.

Technology Services Revenues To Remain Tepid For Q3

The Technology Services division makes up nearly 12% of our estimated valuation for HPE. This vertical has been under pressure as competition in the industry has been intense. As a result, the revenue growth for this segment has suffered, which we expect to continue with the Q3 report. However, the company continues to focus on building its competencies for software-defined hybrid infrastructure services. Despite this, we expect that the revenue growth for the vertical will remain tepid during the quarter.

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