Hewlett Packard Enterprise Reports Strong Q1 2018 Results

Hewlett Packard Enterprise (HPE) has reported solid financial results for the first quarter of fiscal year 2018, with strong revenue growth and improved profitability across its business segments. The company’s strategic initiatives appear to be paying off, though it continues to face some headwinds in its core hardware operations.

Revenue Growth Driven by Hybrid IT and Intelligent Edge

For the three months ended January 31, 2018, HPE reported total net revenue of $7.67 billion, an increase of 11.2% year-over-year (9.4% on a constant currency basis). This was driven by strong performance in the company’s Hybrid IT and Intelligent Edge segments:

The Hybrid IT segment, which includes servers, storage, and data center networking, saw a 10.0% increase in revenue, primarily due to growth in the Compute and Storage business units. This was partially offset by a decline in mission-critical servers. The Intelligent Edge segment, which includes campus and branch networking products, grew 8.8% on the back of strong demand for campus switching products.

The Financial Services segment also contributed to the revenue growth, with a 7.9% increase driven by favorable currency fluctuations and higher asset management revenue. However, the Corporate Investments segment, which includes Hewlett Packard Labs, saw a slight revenue decline.

Profitability Impacted by Margin Pressures

While HPE delivered solid revenue growth, its profitability was impacted by margin pressures, particularly in the Hybrid IT segment. Gross margin for the quarter decreased 3.7 percentage points to 28.4%, due mainly to higher commodity costs, especially for DRAM, as well as competitive pricing pressures.

The decline in gross margin, combined with the impact of transformation costs related to the HPE Next initiative, led to a 3.2 percentage point decrease in operating margin to 3.4%.

At the segment level, Hybrid IT’s earnings from operations as a percentage of revenue decreased 3.1 percentage points to 9.6%, due to the margin pressures mentioned above. Intelligent Edge’s earnings from operations margin increased slightly to 2.9%, while Financial Services’ margin declined 1.1 percentage points to 8.1%.

Strengthening Balance Sheet and Cash Flow

HPE’s balance sheet and cash flow position remain strong, though the company saw a decrease in cash and cash equivalents during the quarter. As of January 31, 2018, HPE had $7.7 billion in cash and cash equivalents, down from $9.6 billion at the end of fiscal 2017.

The decrease in cash was primarily due to $0.9 billion in share repurchases and dividend payments, $0.6 billion in capital expenditures, and $0.6 billion in financial collateral posted, net of returns. However, the company’s operating cash flow turned positive in the quarter, generating $142 million, compared to a $1.19 billion outflow in the prior-year period.

HPE’s liquidity position remains robust, with access to $4.0 billion in revolving credit facilities and $1.5 billion in uncommitted lines of credit. The company also has the flexibility to access the capital markets and issue commercial paper as needed to supplement its liquidity.

Addressing Challenges and Outlook

In the report, HPE acknowledges that it is facing several challenges, including margin pressures in its hardware business, competitive pricing environments, and the impact of commodity cost increases, particularly for DRAM. The company is working to address these issues through its HPE Next transformation initiative, which aims to streamline operations and reduce costs.

Looking ahead, HPE expects these headwinds to persist, but the company remains cautiously optimistic about its ability to navigate the current environment. The strong performance in Hybrid IT and Intelligent Edge, coupled with the company’s focus on cost optimization and portfolio management, should help offset the margin pressures in the near term.

Furthermore, the recent enactment of the U.S. Tax Cuts and Jobs Act had a significant impact on HPE’s effective tax rate in the quarter, resulting in a $2.2 billion tax benefit. While the long-term implications of the tax reform are still being assessed, this one-time benefit provided a substantial boost to the company’s net earnings from continuing operations, which increased to $1.48 billion.

Conclusion

Hewlett Packard Enterprise’s first-quarter results demonstrate the company’s ability to execute on its strategic priorities, with strong revenue growth in its key business segments. However, the persistent margin challenges in the hardware business remain a concern and will require continued focus and discipline from management.

Looking ahead, HPE’s success will depend on its ability to navigate the competitive landscape, manage costs effectively, and capitalize on emerging trends in areas like edge computing and hybrid cloud. The company’s solid balance sheet and liquidity position provide a strong foundation to weather the current headwinds and invest in future growth opportunities.

Overall, HPE’s Q1 2018 performance suggests that the company is making progress in its transformation, but there is still work to be done to fully realize the benefits of its strategic initiatives and deliver consistent, profitable growth for shareholders.