Hewlett Packard (HPE) Q1 Earnings Top, Revenues Miss Mark

Hewlett Packard Enterprise Company (NYSE:HPE) delivered first-quarter fiscal 2020 non-GAAP earnings of 44 cents per share, beating the Zacks Consensus Estimate by a penny. The reported figure also came in higher than the year-ago number of 42 cents. Moreover, non-GAAP earnings came in at the mid-point of management’s guided range of 42–46 cents.

Despite a better-than-expected bottom-line performance, HPE’s shares depreciated nearly 6% in the extended trading session on Mar 3, as revenues missed the consensus mark. Additionally, the company’s downbeat free cash flow outlook for fiscal 2020 turned investors cautious about its near-term performance.

Macroeconomic Factors Hurt Q1 Revenues

HPE reported net revenues of $6.95 billion, which missed the Zacks Consensus Estimate by 3.5% and declined 8% year on year. On a constant currency basis, revenues fell 7%, year over year. The company blamed weaker server demand due to macroeconomic uncertainties, supply constraint, and ongoing shift to cloud computing.

HPE cited that its supply chain has been disrupted due to the coronavirus outbreak in China. Furthermore, organizations are pushing back their big and expensive technology products due to a slowdown in global economic growth. Additionally, more and more organizations continue to shift to cloud computing owing to their maintenance-free and cost effectiveness compared with standalone servers.

Segment wise, the company registered sales contraction across all its major businesses. The Compute (43% of Q1 net revenues) division’s sales decreased 16% year over year to $3.01 billion thanks to component-supply constraints, North America manufacturing capacity constraint and macroeconomic uncertainty.

Apart from the Compute segment, HPE registered sales declines across its Storage and Financial Services businesses. Revenues from Storage business fell 8% year on year to $1.25 billion. Financial Service revenues were down 7% year over year to $859 million.

Nonetheless, slight year-over-year revenue improvement across the HPC & MCS, Intelligent Edge, and A&PS segments partially offset the negative impact of soft performances in the aforementioned segments. HPC & MCS revenues climbed 6% year over year to $823 million. Revenues at the Intelligent Edge division grew 2% to $720 million during the quarter. A&PS division’s sales inched up 1% year over year to $243 million.

Geographically, Hewlett Packard Enterprise’s revenues in the Americas (40% of revenues) decreased 7% at cc. Also, EMEA (37% of revenues) revenues softened 10% at cc and APJ revenues (23% of revenues) fell 2% at cc.

Operating Results

HPE’s non-GAAP gross margin of 33.2% expanded 210 basis points (bps) on a year-over-year basis, aided by a favorable portfolio mix, HPE Next initiatives, and commodity pricing tailwinds. Notably, for the past few quarters, the company is trying to shift focus to higher margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure.

Hewlett Packard Enterprise Company Price, Consensus and EPS Surprise

Hewlett Packard Enterprise Company Price, Consensus and EPS Surprise

Hewlett Packard Enterprise Company price-consensus-eps-surprise-chart | Hewlett Packard Enterprise Company Quote

HPE’s non-GAAP operating profit fell 10% year over year to $602 million. However, non-GAAP operating margin advanced 10 bps, year over year, to 9.6%, primarily on higher margins of the Intelligent Edge and A&PS businesses.

Balance Sheet and Cash Flow

HPE ended the fiscal first quarter with $3.17 billion in cash and cash equivalents compared with the $3.75 billion recorded at the end of fourth-quarter fiscal 2019.

During the reported period, Hewlett Packard Enterprise used $79 million of cash for operational activities. Free cash flow was also negative $185 million in the quarter.

Additionally, the company repurchased shares worth $204 million and paid out $156 million as dividends.

Guidance

HPE does not expect revenue growth this year due to the coronavirus-led supply-chain disruptions. Notably, during the Security Analyst Meeting last October, HPE had anticipated revenue growth of 1-3% over the next three years.

Furthermore, the company is finding it difficult to quantify the real impact of coronavirus-led demand and supply disruptions. Therefore, management didn’t provide earnings guidance for the fiscal second quarter.

Also, the server maker trimmed its free cash flow outlook to $1.6-$1.8 billion from $1.9-$2.1 billion. However, it reaffirmed the non-GAAP earnings guidance range of $1.78-$1.94 per share.

Zacks Rank & Stocks to Consider

Hewlett Packard Enterprise currently carries a Zacks Rank #5 (Sell).

A few better-ranked stocks in the broader technology sector are Atlassian Corporation PLC (NASDAQ:TEAM) , NVIDIA Corporation (NASDAQ:NVDA) and Akamai Technologies, Inc. (NASDAQ:AKAM) , each carrying a Zacks Rank of 2 (Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Atlassian, NVIDIA and Akamai is 22.3%, 12.7% and 12%, respectively.


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