Hewlett Packard Enterprise Company (10-Q)
Hewlett Packard Enterprise Company (10-Q)
Hewlett Packard Enterprise Company (HPE) reported its quarterly financial results for the period ended July 31, 2018. The company’s revenue decreased by 13% year-over-year to $7.76 billion, primarily due to the decline in Enterprise Group revenue. Net earnings were $444 million, or $0.30 per diluted share, compared to net earnings of $1.04 billion, or $0.69 per diluted share, in the same period last year. The company’s gross margin was 17.4%, down from 18.3% in the same period last year. HPE’s cash and cash equivalents decreased by $1.4 billion to $4.4 billion, primarily due to the payment of dividends and share repurchases. The company’s debt increased by $1.1 billion to $24.4 billion. HPE’s management attributed the decline in revenue to the ongoing transition of its business and the impact of currency fluctuations.
Overview of Financial Performance
Hewlett Packard Enterprise (HPE) reported solid financial results for the three and nine months ended July 31, 2018. Total net revenue increased by 3.5% and 8.0% respectively compared to the prior-year periods, driven by growth across the company’s key business segments.
Revenue and Profit Trends
The Hybrid IT segment, which includes the company’s server, storage and technology services businesses, saw net revenue increase by 2.7% and 6.4% for the three and nine month periods. This was primarily due to growth in the Compute business from higher average selling prices and increased market demand for industry standard servers. The Intelligent Edge segment, which includes the Aruba networking products, also delivered strong performance with revenue growth of 10.4% and 12.1%. The Financial Services segment saw more modest increases of 3.5% and 5.4% in net revenue.
From a profitability perspective, HPE’s operating margin improved significantly, increasing by 3.9 percentage points in the three-month period and 1.1 percentage points in the nine-month period. This was driven by a combination of higher gross margins, particularly in Hybrid IT, as well as lower operating expenses as a percentage of revenue. The company was able to maintain strong earnings from operations in the Hybrid IT (10.6% and 10.2% of revenue) and Intelligent Edge (11.6% and 7.3%) segments.
Strengths and Weaknesses
One of HPE’s key strengths is its diversified portfolio of infrastructure, edge computing and technology services offerings. The company has been able to capitalize on growing demand for its Compute, Storage and Aruba networking products. Additionally, the HPE Next initiative to streamline the business and shift investments towards higher growth, higher margin solutions appears to be paying off, as evidenced by the margin expansion.
However, HPE continues to face some headwinds, particularly in its Hybrid IT business where gross margins declined due to a higher mix of lower margin solutions and increased variable compensation expense. The company also experienced a decrease in gross margin in the Financial Services segment due to higher bad debt expense. Additionally, the company’s research and development expenses increased as it invests in new product development.
Outlook and Future Prospects
Looking ahead, HPE expects to build on its momentum and continue executing on the HPE Next transformation initiative. The company is focused on streamlining its portfolio, optimizing its go-to-market approach, and shifting investments towards high-growth, high-margin solutions and services.
Key financial metrics by segment for the three and nine months ended July 31, 2018 are summarized in the tables below:
Three Months Ended July 31, 2018
| Metric | HPE Consolidated | Hybrid IT | Intelligent Edge | Financial Services | Corporate Investments |
|---|---|---|---|---|---|
| Net Revenue ($ millions) | 7,764 | 6,243 | 785 | 928 | - |
| Year-over-Year Change | 3.5% | 2.7% | 10.4% | 3.5% | NM |
| Earnings from Operations ($ millions) | 516 | 661 | 91 | 73 | (24) |
| Earnings from Operations as % of Revenue | 6.6% | 10.6% | 11.6% | 7.9% | NM |
| Year-over-Year Change (percentage points) | 3.9 | 2.7 | (3.0) | 0.2 | NM |
Nine Months Ended July 31, 2018
| Metric | HPE Consolidated | Hybrid IT | Intelligent Edge | Financial Services | Corporate Investments |
|---|---|---|---|---|---|
| Net Revenue ($ millions) | 22,906 | 18,597 | 2,115 | 2,732 | (1) |
| Year-over-Year Change | 8.0% | 6.4% | 12.1% | 5.4% | NM |
| Earnings from Operations ($ millions) | 1,174 | 1,890 | 155 | 217 | (67) |
| Earnings from Operations as % of Revenue | 5.1% | 10.2% | 7.3% | 7.9% | NM |
| Year-over-Year Change (percentage points) | 1.1 | 0.6 | (1.5) | (0.7) | NM |
The results demonstrate HPE’s ability to drive revenue growth and margin expansion across its core business segments. The company’s focus on high-growth, high-margin solutions appears to be yielding positive results. However, the decline in gross margins in certain areas, as well as the increase in R&D spending, will be important factors to monitor going forward.
Overall, HPE seems well-positioned to continue its transformation and capitalize on trends in enterprise IT, edge computing and technology services. The company’s strong cash flow and balance sheet provide flexibility to invest in the business, return capital to shareholders, and pursue strategic opportunities. Investors will be closely watching HPE’s ability to sustain its momentum and deliver on its long-term financial targets.
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