Hewlett Packard Enterprise Faces 'Some Current Headwinds'

| About: Hewlett Packard (HPE)

Summary

HPE reported a discouraging YoY decrease in Non-GAAP earnings per share (-17%) and management has projected a performance crushing YoY decrease of -47% for the next QE.

Management has maintained their fiscal year 2017 outlook of $1.46 to $1.56 for Non-GAAP earnings per share. That means Q4, the QE 10-31-17, needs to be $0.40 to $0.50.

HPE is a different, smaller company. Both financial performance and position have been materially affected by the separation of the Enterprise Services segment.

Earnings per Share

Hewlett Packard Enterprise (NYSE:HPE) reported earnings for the quarter ending April 2017 on Wednesday, May 31. CEO Meg Whitman was not able to encourage investors with a YoY decrease in Non-GAAP earnings per share (-17%) and a YoY decrease in revenues (-12%).

This quarter Non-GAAP EPS of $0.35 was a inline with both the average analysts' and management estimates, a QoQ decrease (-22%) and a YoY decrease (-17%). This is below the average EPS for the prior five restructured quarters of $0.48. Since the restructuring, beginning with the QE January 2016, Non-GAAP earnings per share have now been $0.35, $0.45, $0.61, $0.49, $0.42, $0.41, in reverse chronological order. This includes both continuing and discontinued operations, net.

What is the HPE Management Guidance?

Estimated QE July 2017 Earnings per Share (Non-GAAP):

  1. HPE Estimate: $0.24 to $0.28
  2. Prior Year $0.49 = -51% to -43% YoY
  3. Prior Quarter $0.35 = -31% to -20% QoQ

Estimated FYE October 2017 Earnings per Share (Non-GAAP):

  1. HPE Estimate: $1.46 to $1.56
  2. Prior Year $1.92 = -24% to -19% YoY

Earnings per Share Year Over Year Growth Rate (%)

The Non-GAAP EPS for the QE 4-30-17 of $0.35 is a -17% decrease year over year, from $0.42 for the QE April 2016. The prior QE 1-31-17 was a better +10%, from $0.41 to $0.45. The HPE management average estimate for the next quarter, QE 7-31-17, is -47%, from $0.49 to about $0.26. I am not including data from before the restructuring, which began QE 1-31-16. Therefore, it will take more quarters to build a history.

Revenues

Net revenues for QE 4-30-17 were $7.45 billion. Net revenues have averaged $8.1 billion for the prior five restructured and restated quarters reported. A decrease to $9.6 billion had been projected by the analysts, so this was especially disappointing. HPE management does not project net revenues, so there is no guidance.

Gross, Operating, and Net Margins

HPE GAAP & Non-GAAP gross profit dropped to $2.52 billion, or 33.8% of net revenues, as can be seen in the chart below. The gross, operating, and net margins are the lowest reported in the six restructured quarters reported for both GAAP and Non-GAAP.

Revenues by Segment and Detailed Segment

Hewlett Packard Enterprise no longer includes Enterprise Services, which was a significant 35% (before intracompany eliminations) of net revenues in the prior QE January 2017. Therefore, a third of revenues have been separated from HPE to the newly formed DXC Technology (NYSE:DXC).

Quarterly revenues by segment data is limited by the restatement of only the QE's April 2017, January 2017, and April 2016. The restatements to-date did not affect other segments significantly, but still this could happen for other quarters. For the most recent quarter ending April 2017, the Enterprise Group, which comprises 84% of net revenues, was $6.24 billion, a QoQ decrease from $6.33 billion and a YoY decrease from $7.16 billion. This is now the HPE core business. This is the lowest reported in the six restructured quarters for both GAAP and Non-GAAP.

Quarterly revenues by segment, before intracompany eliminations (>100%), are comprised of the Enterprise Group (84%), Financial Services (12%), Software (9%), and Corporate Investments (now 0%).

The Software segment is the next to go, will transition to Micro Focus in the 2017 third quarter, and will not be part of the "Future HPE". Software accounted for $685 million in the QE 4-30-17, a QoQ decrease from $721 million and a YoY decrease from $774 million.

Conclusion

Financial Performance: Non-GAAP financial performance is not encouraging and with all the restructurings the future is uncertain. GAAP financial performance is dismal. Approximately a third of net revenues, the Enterprise Services segment, have now been spun off to DXC Technology. The Software segment will transition to Micro Focus this year (<10% of net revenues). That will leave the segments Enterprise Group, Financial Services, and Corporate Investments as the profit centers.

Financial Position: Financial position is adequate with a capital to assets ratio of 43%. Working capital is $2.70 billion. The current assets to total assets ratio is 30%, so there is liquidity. The total debt ratio, both short-term and long-term, is a little high at 21% of total assets. The balance sheet has changed as a result of the separation of the Enterprise Services segment. Total assets decreased from $76.7 billion at the pre-separation QE 1-31-17 to $67.5 billion at the post-separation QE 4-30-17. That's a -12% decrease.

HPE Current Headwinds: In the latest quarterly earnings call CEO Meg Whitman said, "So overall, despite some current headwinds, I remain very confident in our strategy. We will continue to invest in our three strategic pillars; hybrid IT, the intelligent edge and our Pointnext services model and we will continue to find efficiencies and productivity in the new HPE that will allow us to run the company more profitably with each passing quarter."

Dividends: HPE declared a dividend of $0.065 on March 23, payable July 5, for stockholders of record June 14. At a selected benchmark $18.00 stock price this is a 1.44% annualized yield. The dividends paid for the past six quarters have been $107M, $109M, $92M, $91M, $94M, $96M, in reverse chronological order.

Stock Repurchases: HPE repurchased $670 million of common stock in the QE April 2017. These repurchases, combined with the $107M dividends, equal $777M of earnings returned to shareholders. The repurchases for the past six quarters have been $670M, $641M, $0M, $1.45B, $15M, $1.20B, in reverse chronological order.

Stock Price: HPE stock has been in a long-term upward trend. The separation of the Enterprise Services segment created a smaller, different company that will need to establish its own upward trend. HPE does have some price support from the dividends, the dividend yield, and stock repurchases. With a stock beta of 2.70, this stock provides opportunities for short-term fast traders.

Fiscal Year Outlook: HPE management outlook for the FYE 10-31-17 for Non-GAAP Earnings per Share is $1.46 to $1.56. To date, Q1 was $0.45 and Q2 was $0.35. Management outlook for Q3 is $0.26. That leaves Q4 to make up the difference with $0.40 to $0.50. In the most recent earnings call, CEO Meg Whitman and CFO Tim Stonesifer said this could be achieved and were not changing the Fiscal 2017 outlook. Management stated in the earnings call that $200M - $300M in expenses are targeted to be reduced to assist in meeting the annual EPS outlook.

Stock Evaluation & Opinion: As an intermediate-term to long-term investor and viewpoint, I consider HPE stock to be an short-term and intermediate-term Sell, compared to Buy or Hold. I am negative on HPE stock both short-term and intermediate-term, compared to positive or neutral. Long-term financial performance will hopefully have better prospects and management is promising a strong fiscal year end finish to meet the annual Non-GAAP EPS outlook of $1.46 to $1.56. The management-promised "Future HPE" is not here yet.

Restructuring

For all the data and commentary above, I have used only information since the original restructuring and separation from HP (NYSE:HPQ), which was effective for the QE January 2016. There have now been six quarters reported since that separation. Additional restructuring expenses continue to be incurred and there will be yet more restatements of prior quarterly earnings.

As noted earlier in the article, yet another separation has occurred. The Enterprise Services business segment was merged with Computer Sciences Corporation and renamed DXC Technology effective April 3, 2017. This has materially affected both financial position and financial performance for Hewlett Packard Enterprise beginning with the QE April 2017. Both the quarterly balance sheets and income statements have been restated by management for the current and prior quarters to reflect the spinoff.

The Software segment will transition to Micro Focus in the 2017 third quarter, and will not be part of the "Future HPE". That will leave HPE with the Enterprise Group as the core business.

(Graphs created by author using data from HPE. Intermediate-term = 1-3 months, Long-term = 3+ months for purposes of the above discussion.)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Networking & Communication Devices, Earnings
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