What To Expect From HP Enterprise Through Fiscal 2018 After Q3 Revenue Slowdown

by Trefis Team
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HP Enterprise (NYSE:HPE) announced its fiscal third quarter earnings on August 28, reporting a modest 3% y-o-y increase in net revenues to $7.8 billion. Revenue growth slowed down in the core Hybrid IT segment, with revenues increasing just 3% over the comparable prior year period to $6.2 billion. This segment includes revenues from servers, storage as well as technology services. Additionally, Intelligent Edge (networking) revenues continued their double digit growth, with a 10% y-o-y increase to $785 million for the quarter. This segment was further strengthened by the Cape Networks acquisition in the previous quarter. The company’s third key segment, Financial Services, also reported a 3% increase in net revenues to $928 million for the quarter. In the first half of the fiscal year, Hybrid IT revenues drove top line growth due to which segment revenues were up over 6% on a y-o-y basis to $18.6 billion for the three quarters combined. We expect the company to end the current fiscal year with overall revenue growth of around 3% to nearly $31 billion for the year. We have created an interactive full year earnings forecast dashboard for HP Enterprise that highlights our expectations for the year. You can modify drivers such as segment revenues and margin figures to see how the company’s earnings would be affected for the full year.

Key Growth Drivers

HPE has reported growth in its Hybrid IT product portfolio in the first half of the year, with solid growth in compute and storage revenues in recent quarters. The company continues to focus on enterprise hardware and customer services in order to continue the revenue growth in the coming quarters. It should be noted that while revenue growth slowed down slightly in Q3 to 3%, HPE reported 5% growth in the segment excluding Tier-1 revenues. We expect this trend to continue through the end of fiscal 2018 in October. We forecast Hybrid IT revenues to be over $24 billion for the year (revenues for the 9 months ended July stand at $18.6 billion). We further forecast HPE’s Financial Services revenues to be up in the mid to high single digits to around $3.8 billion for the year. The company has enhanced its focus on core servers, as well as high-margin networking product lines, which have higher average prices and margins relative to the custom commoditized Tier-1 products. The company also launched Edgeline Converged Systems which should help it expand its margins in the coming quarters. We forecast the company’s adjusted operating margin to expand 140 basis points to over 11% for the year.

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