Hewlett Packard Enterprise Gets Leaner And Focuses On Hybrid Cloud

| About: Hewlett Packard (HPE)

Summary

HPE has been slow to take to the cloud and therefore it abandoned its public cloud plans to focus on its hybrid cloud strategy.

Analysts are happy with the leaner HPE and its potential to dominate the hybrid cloud market.

Meanwhile, HP Inc. (the other part of the spin-off) continues to struggle.

According to a MarketsandMarkets report, the hybrid cloud market is expected to reach $85 billion in 2019, up from $25 billion in 2014. That translates to a CAGR of 27%, which outpaces the growth of the overall IT market. Hybrid cloud is a strong focus area for Hewlett Packard Enterprise (NYSE:HPE) after the recent split. HP (NYSE:HPQ), on the other hand, is continuing to struggle after the split.

HPE's Financials

Second quarter revenues grew 1% over the year to $12.7 billion, the first year-over-year growth reported in five years. Non GAAP EPS was $0.42. Analysts expected revenue of $12.4 billion and EPS of $0.42. It paid $109 million in dividends and share repurchases to shareholders.

By segment, Enterprise Group revenue grew 7% to $7 billion with revenue from servers up 1%, storage up 2% and networking up 57%. Enterprise Services revenue fell 2% to $4.7 billion driven by a 3% decline in Application and Business services. Software revenues fell 13% to $774 million with License revenues falling 12% and professional services falling 3%. Financial Services revenue fell 2% to $788 million.

For the third quarter, HPE expects non GAAP EPS to be in the range of $0.42-$0.46 and GAAP EPS of $1.1 to $1.14. Analysts expect earnings of $0.44 on revenue of $12.64 billion.

HPE expects to end the year with non GAAP earnings of $1.85-$1.95 per share. The market was looking for earnings of EPS of $1.88 on revenue of $51.23 billion.

Among other highlights, HPE also announced that it will further spin off its Enterprise Service business and merge it with Computer Sciences Corp. (NYSE:CSC). The transaction is expected to close in Mar 2017 and deliver approximately $8.5 billion to HPE's shareholders including $4.5 billion in equity and $1.5 billion as cash dividend. The Services business employs 10,000 people or two-thirds of its workforce. It accounts for 40% of its total revenues but had lower profit margins than other segments. With this spinoff, the majority of HPE's revenues will come from its hardware business.

HPE's Hybrid Cloud Takes Off

In another major development, HPE recently announced that it will be partnering with Dropbox (Private:DROPB). Dropbox, which has over 500,000 users, will be switching over from Amazon Web Services to the more affordable HPE Proliant and Cloudline servers. This is a big win for HPE's hybrid cloud, which provides a way for big companies to combine the best of the cloud with their own localized data centers.

In the recently held Discover annual customer show, HPE announced that it plans to ship Docker preinstalled on select HPE servers. It also announced four product updates to its HPE Helion cloud portfolio that will focus on its hybrid and private cloud capabilities. HP has been slow to take to the cloud and therefore it abandoned its public cloud plans to focus on its hybrid cloud strategy.

Analysts are happy with the leaner HPE and its potential to dominate the hybrid cloud market. Its stock hit a 52-week high of $19.65 last week and is currently trading at $18.60 with a market capitalization of $32.07 billion. It hit a 52-week low of $11.63 in January this year.

Meanwhile, HPQ Continues to Struggle

Second quarter revenues continued to fall at HP Inc. Revenues declined 11% over the year to $11.6 billion, missing analyst forecast of $11.75 billion. Non GAAP EPS of $0.41 was ahead of analyst forecast of $0.39. Earlier coverage is available here.

By segment, revenues from Personal Systems fell 10% to $6.9 billion driven by 16% decline in consumer revenue and 7% decline in the commercial revenues. Total unit shipments were down 9% with units of Notebooks down 6% and desktops down 10%. Revenues from the Printing segment fell 16% year over year to $4.64 billion mainly due to a 16% decline in supplies revenue and weak hardware segment performance.

For the third quarter, HP estimates non-GAAP EPS to be in the range of $0.37 to $0.40 and GAAP EPS in the range of $0.34 to $0.37. Analysts expect EPS of $0.39 on revenue of $11.57 billion.

For fiscal year 2016, HP estimates non-GAAP EPS in the range of $1.59 to $1.65 and GAAP EPS in the range of $1.52 to $1.58. Analysts expect EPS of $1.6 on revenue of $47.27 billion.

HP Inc.'s stock is trading at $13.03 with a market capitalization of $22.29 billion. It touched a 52-week high of $16.17 in May last year. The stock has recovered from a 52-week low of $8.91 it hit in early February.