Overview

Hewlett Packard Enterprise (HPE) is a global technology leader focused on developing intelligent solutions that allow customers to capture, analyze and act upon data from edge to cloud. The company organizes its business into four segments: Hybrid IT, Intelligent Edge, Financial Services, and Corporate Investments.

In fiscal 2018, HPE’s total net revenue increased by 6.9% (5.0% on a constant currency basis) to $30.9 billion. This was driven by growth in the Hybrid IT and Intelligent Edge segments, partially offset by a decline in the Corporate Investments segment. Gross margin remained flat at 30.1%, as improvements in Financial Services and lower costs in Corporate Investments were offset by a decline in Hybrid IT. Operating margin increased by 3.8 percentage points to 6.0% due to lower expenses for restructuring, separation costs, and acquisition-related charges.

As of October 31, 2018, HPE had $4.9 billion in cash and cash equivalents, down from $9.6 billion the prior year. This decrease was due to $4.1 billion in share repurchases and dividend payments, $4.1 billion in debt payments, and $1.9 billion in capital expenditures, partially offset by $3.0 billion in cash from operations and $2.5 billion in debt issuances.

Revenue and Profit Trends

Hybrid IT, HPE’s largest segment, saw net revenue increase 6.0% (4.1% constant currency) in fiscal 2018, driven by growth in Compute and Storage. Compute revenue grew 8% due to higher average unit prices in core Industry Standard Servers, while Storage revenue increased 13% primarily from the Nimble Storage acquisition. However, HPE Pointnext services revenue was flat. Hybrid IT earnings from operations as a percentage of revenue increased 1.0 percentage point to 10.6%, as lower operating expenses offset a decline in gross margin.

The Intelligent Edge segment, which includes the HPE Aruba networking business, saw net revenue increase 13.4% (11.2% constant currency) in fiscal 2018. This was driven by 14% growth in HPE Aruba Product revenue from campus switching and edge compute products. Intelligent Edge earnings from operations as a percentage of revenue decreased 1.7 percentage points to 8.1% due to lower gross margin and higher operating expenses.

Financial Services (FS) net revenue increased 1.9% (0.4% constant currency) in fiscal 2018, driven by higher asset management revenue, partially offset by lower rental and lease buyout revenue. FS earnings from operations as a percentage of revenue decreased 0.4 percentage points to 7.9% due to higher operating expenses, partially offset by improved gross margin.

The Corporate Investments segment, which includes the company’s research labs and certain cloud-related activities, saw net revenue decrease 133% in fiscal 2018 due to lower IP-related royalty revenue. The segment’s loss from operations improved 15% year-over-year.

Strengths and Weaknesses

A key strength for HPE is its leading position in the Hybrid IT market, which includes servers, storage, and related services. The company has been able to drive growth in this segment through innovations in its core server and storage product lines, as well as strategic acquisitions like Nimble Storage. However, the Hybrid IT business faces challenges as customers migrate workloads to the cloud, putting pressure on traditional hardware sales.

The Intelligent Edge segment, anchored by the HPE Aruba networking business, has been a bright spot for the company, delivering double-digit revenue growth. Aruba’s campus switching and edge compute products are resonating well with customers as enterprises invest in their network infrastructure. This segment represents an important growth opportunity for HPE as the network edge becomes more critical.

In contrast, the Corporate Investments segment, which includes the company’s research labs, has been a drag on profitability. While the company has taken steps to streamline this part of the business, it continues to generate losses.

Another weakness is HPE’s reliance on international markets, which expose the company to foreign currency fluctuations. While the company has taken steps to hedge this risk, currency movements can still have a material impact on reported results.

Outlook and Strategic Initiatives

Looking ahead, HPE faces several key challenges, including the ongoing shift of workloads to the cloud, increased competition from major rivals expanding their product and service offerings, and the need to optimize its go-to-market execution and cost structure.

To address these challenges, HPE launched the HPE Next initiative in 2017. This program is designed to simplify the company’s operating model, streamline its offerings and business processes, and shift investments towards high-growth, higher-margin solutions and services. Key focus areas include an edge-to-cloud data platform, multi-cloud management through OneSphere, consumption-based service models with HPE GreenLake, and the adoption of composable infrastructure.

The success of the HPE Next initiative will be critical in enabling the company to navigate the industry shifts, sharpen its competitive edge, and deliver profitable growth. Investors will be closely watching HPE’s progress in executing on this transformation plan over the next few years.

In the meantime, HPE’s strong cash flow generation, healthy balance sheet, and ongoing share repurchase program provide some financial flexibility as the company works to reposition itself for the future. However, the company’s reliance on international markets and exposure to industry disruption will remain key risks that could impact its performance.

Overall, HPE appears to be taking the necessary steps to address its challenges, but executing its strategic initiatives amid a rapidly evolving technology landscape will be crucial in determining the company’s long-term success. Investors should monitor HPE’s ability to drive profitable growth in its core Hybrid IT and Intelligent Edge businesses, while also successfully transforming its operating model and cost structure through the HPE Next program.