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Hewlett Packard (HPE) Down 5% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Hewlett Packard Enterprise Company HPE. Shares have lost about 5% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Hewlett Packard Q2 Earnings Miss, Q3 Guidance Weak

Hewlett Packard Enterprise reported lower-than-expected bottom-line results for second-quarter fiscal 2017, which also declined year over year. The company’s non-GAAP earnings of $0.25 per share came below the Zacks Consensus Estimate of $0.35 and were significantly lower than its guidance range of $0.33–$0.37. Also, the figure plunged 24.2% on a year-over-year basis.

On a GAAP basis, the company reported loss of $0.29 from continuing operations against earnings of $0.18 reported in the year-ago quarter. It also compared unfavorably with the guided range of a loss of $0.03–$0.07.

Per the company, the dismal bottom-line performance was mainly due to decline in revenues and “a one-time non-cash GAAP-only valuation allowance of our U.S. state domestic deferred tax assets resulting from the changes were legal structure related to the spinoff of enterprise services.”

Notably, during the quarter the company completed the spin-merger of its Enterprise Services business. Therefore, Hewlett Packard considered Enterprise Services as a discontinued operation in the fiscal second quarter. Furthermore, the company expects the pending spin-merger of its Software business to close by the end of this summer.

Quarter in Detail

Revenues

Hewlett Packard Enterprise reported revenues from continuing operations (which includes Enterprise Group, HPE Financial Services and Software businesses) of $7.445 billion, down 12.5% from the year-ago quarter’s revenues of $8.509 billion. Combined net revenue, which also includes the discontinued operations of Enterprise Services business, came in at $9.9 billion. The Zacks Consensus Estimate was pegged at $9.854 billion.

The year-over-year decline was mainly due to reduced server unit sales, decline in software sales, competitive pricing, heightened commodities pricing pressure, unfavorable exchange rates, soft market condition and some execution issues. Adjusted for currency exchange rates and divestures, the company’s revenues from continuing operations were down just 5% year over year. Unfavorable currency exchange rates adversely affected revenues by 80 basis points (bps).

During the reported quarter, the company witnessed uneven global demand across all regions. In the U.S., sales were stable as the impact from reduced software and Tier 1 server sales were offset by improved sales of core servers and strong growth in networking business. Europe’s contribution remained weak, while the Asia-Pacific and Japan (APJ) region registered mixed demand, with encouraging performance in Japan and India that was more than offset by dismal performance in the rest of Asia.

Segment wise, revenues at the Enterprise Group were down 13% from the year-ago quarter to $6.2 billion. However, adjusting for divestures and currency, segment revenues were down 7% mainly due to sustained commodities pricing pressure. Revenues from Servers, Storage, Networking and Technology Services were down 14%, 13%, 30% and 2%, respectively.

Software revenues declined 11% to $685 million. Adjusted for divestures and currency, the segment’s revenues were down 9% when compared with the year-ago quarter. Revenues from License, Support and Professional Services were down 29%, 4% and 17%, respectively. SaaS revenues, however, grew 3% year over year.

Financial Services revenues were up 11% to $872 million. The segment’s net portfolio edged down 1%, while financing volume dipped 7% year over year.

Operating Results

Hewlett Packard Enterprise’s gross margin contracted 20 basis points (bps) on a year-over-year basis to 28.9%. The year-over-year gross margin contraction was mainly due to competitive pricing, elevated DRAM pricing, unfavorable currency, as well as stranded costs and short-term dilution from the recent acquisitions.

Moreover, the company’s non-GAAP operating margin declined 130 bps to 7.8% mainly due to a lower gross margin which was partially offset by a decline in non-GAAP operating expenses as a percentage of revenues.

Balance Sheet and Cash Flow

Hewlett Packard Enterprise ended the fiscal second quarter with $8.1 billion in cash and cash equivalents, significantly down from $9.86 billion recorded at the end of the previous quarter. Long-term debt at the quarter end was $11.904 billion compared with $12.270 billion last quarter.

During the quarter, Hewlett Packard Enterprise generated $636 million of cash flow from operational activities. However, free cash flow was negative $64 million. For the first half of fiscal 2017, the company used $828 million of cash flow for operational activities.

Additionally, during the quarter, the company returned $777 million to its shareholders, of which $670 million was through share repurchases and the remaining through dividend payments. During the first half of fiscal 2017, Hewlett Packard Enterprise returned $1.527 billion to its shareholders, of which $1.311 billion was through share repurchases and the remaining through dividend payments.

Guidance

The company issued a disappointing bottom-line guidance for third-quarter fiscal 2017. Hewlett Packard Enterprise expects non-GAAP earnings per share in a range of $0.24–$0.28 (mid-point: $0.26). On a GAAP basis, the company guides the bottom line to be in a range of a loss of $0.02 to earnings of $0.02.

For fiscal 2017, the company reiterated the outlook it revised in early April. The company expects non-GAAP earnings per share for fiscal 2017 in the range of $1.46–$1.56 (mid-point $1.51). On a GAAP basis, the company projects the bottom line to be in a range of a loss of $0.03 to earnings of $0.07.

In addition, Hewlett Packard Enterprise anticipates free cash flow in fiscal 2017 to be negative $1.8 billion.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

Hewlett Packard Enterprise Company Price and Consensus

 

VGM Scores

At this time, the stock has a subpar Growth Score of 'D', though it is lagging a bit on the momentum front with an 'F'. However, the stock was allocated a grade of 'A' on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for value based on our styles scores.

Outlook

While estimates have been moving downward, the magnitude of the revision is net zero. Notably, the stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.


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