What To Expect From HPE In 2018 And Beyond

It has been an eventful year for HP Enterprise (NYSE:HPE). During the year, the company successfully divested some non-core businesses, and as a result, has returned close to $17 billion to shareholders. Additionally, it continues to focus on building out its core portfolio of services to serve the hybrid cloud infrastructure vertical. In this note, we explore HPE’s outlook for 2018 and beyond.

Our price estimate for HPE stands at $14, which is slightly below the current market price.

Focus on Growth Verticals

During its earnings release for FY17, HPE said that it was aggressively targeting growth verticals such as hybrid cloud and the Internet of Things. The company is:

• Offering comprehensive Hybrid IT solutions through its data center, systems software, private cloud and public cloud partnerships.
• Networking through specific products such as Edgeline converged systems, which targets the Industrial Internet of Things, and Aruba’s campus and branch networking.
• Offering a universal IoT software platform that seamlessly integrates data from different IoT systems.
• Focusing on advisory, professional and operational services and capabilities to customers on a pay-as-you-go (consumption based) model.

Simplifying Company Structure

The company is also executing an initiative called HPE Next. Through HPE Next, the company will prioritize investments in growth areas, simplify its organizational structure and redesign some of its business processes to offer high margin solutions and services. Under the HPE Next initiative, the company also plans to optimize its end-to-end cost structure to improve profitability.

The company’s HPE Next program is expected to drive gross cost saving of $1.5 billion over the next three years. HPE plans to invest about $700 million of the savings into R&D, operations and go-to-market market strategy for key growth areas such as AI, cloud, and IoT. As a result, by 2020 the net cost savings will be approximately $800 million on a run rate basis.

In order to achieve this level of cost savings over the duration of the program, HPE expects to spend approximately $1.1 billion in cash payments that will be partially offset by real estate sales, which will generate $300 million in cash in the next three years. While the company plans to spend two-thirds of these payments for optimizing the workforce, the remainder will be used to upgrade and simplify its IT systems.

Outlook For 2018 And Beyond

In the last earnings release, the company announced that it was exiting the custom commoditized Tier -1 server market and is now focusing on core servers, which have higher average prices and margins. The company expects modest revenue growth as it exits sales to tier-1 service providers. HPE expects its non-GAAP operating margin to be approximately 9.5%, and expects non-GAAP diluted EPS of $1.15 to $1.25 for FY18. Additionally, the company will return close to $2.5 billion to its shareholders through share repurchases and dividends.

In the long term, the company expects to drive modest revenue growth of around 0-1% organically.  It also expects that its operating profit will grow by 4-5% annually due to an optimized operating model, reduced cost structure, and favorable mix shift. However, the share repurchase program will reduce the outstanding share count and is expected to drive 7-9% annual growth in EPS over time.

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

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