HPE posts strong earnings, but investors are still doubtful
Updated Wednesday
Hewlett Packard Enterprise Co. finally gave investors something to smile about after a string of disappointing earnings results, handily beating revenue and earnings per share targets and finally showing some year-over-year revenue growth for its fiscal third quarter.
Investors rewarded the company with a nearly 5 percent boost in its share price in after-hours trading after nearly a 2 percent drop in regular trading, to $14.04 a share. However, on Wednesday, shares were falling nearly 2 percent as investors appeared to have nagging doubts about HPE’s strategic direction and the impact of public cloud computing providers on its core server business.
Moreover, the stock is still far from recovered from the 21 percent beating it took last Friday. That’s the day HPE announced that it completed the $8.8 billion spinoff of its software business to U.K.-based Micro Focus International plc.
Chief Executive Meg Whitman (pictured) also reiterated that despite a recent but unsuccessful run at the top job at ride-hailing giant Uber Technologies Inc., she’s dedicated to HPE at least for the time being. Although she noted that her interest came from the similarity of Uber’s business model to that of eBay Inc., where she was longtime CEO, “in the end it turned out not to be the right thing,” she told analysts during the earnings conference call.
Delivering on its previous-quarter promise that the worst is over, HPE reported quarterly revenue rose 3 percent, or 6 percent not counting currency shifts, to $8.2 billion, well above analyst consensus estimates of $7.49 billion. Earnings per share of 30 cents, before certain costs such as severance payments, also beat the consensus estimate of 26 cents.
Solid growth in Europe/Middle East/Africa and the Asia/Pacific region offset a modest decline in Americas revenue. The results reversed a year of dismal news in which the company missed revenue estimates four quarters in a row and suffered double-digit revenue declines in the past two quarters. “Overall, I’m very pleased with our Q3 performance,” said Whitman. “We saw strong momentum across the portfolio.”
A 1 percent decline in server revenue was offset by strong growth on the storage and networking side. However, weak server sales are not necessarily an indication of a weak business, said Patrick Moorhead, president and principal analyst at Moor Insights & Strategy.
“While big in revenue, these public cloud [server] deals are light or even negative in margin,” he said. Indeed, Whitman emphasized that sales to these large “Tier 1” customers are a “lumpy business with not much profit.”
Whitman also said sales of HPE’s new Synergy line of hyperconverged platforms that combine computing, storage and networking capabilities grew 200 percent, although off a small base. Sales of flash storage arrays exceeded both revenue and profit plans as well.
The storage business growth is a positive in light of increased competition from NetApp Inc. and Pure Storage Inc., said Moorhead. “For the past year, networking has consistently done well, driven by Aruba’s double-digit growth,” he said, referring to HPE’s Aruba Networks Inc. subsidiary. Aruba sales grew more than 30 percent in the quarter as the company won 70 new large customers, Whitman said.
Earlier in the day, HPE said it will acquire Cloud Technology Partners Inc., a consulting, design and advisory services company that specializes in helping companies choose infrastructure-as-a-service vendors. Terms weren’t disclosed. HPE said it will fold the acquired company into its Pointnext unit, which provides consulting and implementation services for information technology organizations.
CTP helps organizations determine which applications are best suited to move to the cloud and assists with execution and organizational change. The company’s suite of managed services helps customers clients achieve governance, risk and regulatory compliance while reconciling cloud spending with projected savings in the original business case.
The seven-year-old company has completed nearly 500 cloud transformation projects, according to an HPE press release. HPE Chief Financial Officer Timothy Stonesifer said that despite CTP’s focus on moving clients mostly to Amazon Web Services Inc.’s cloud, the acquisition helps round out a portfolio of products and services that the company calls “hybrid IT,” which encompasses cloud and data center computing.
HPE has been on a buying spree all year, highlighted by January’s purchase of SimpliVity Corp. for $650 million and its acquisition less than two months later of purchased Nimble Storage Inc. for about $1 billion. It also picked up financial management specialist Cloud Cruiser Inc. in January and security analytics firm Niara in February.
One elephant in the room was news that emerged last week that Whitman had negotiated more aggressively for the top job at Uber Technologies Inc. than had been earlier reported. The implied lack of confidence could be taken as a negative, but Moorhead said the story shouldn’t be a referendum on HPE.
“Whitman has been very clear she would stay with HPE until their transformation was complete,” he said. Now that the services and software divisions have been spun off, acquisitions of growth-market businesses completed and Antonio Neri installed as president and general manager of the core Enterprise Group, “I wouldn’t be surprised if she left.” However, Whitman insisted, “I actually am not going anywhere.”
HPE issued new guidance, saying it expects to earn 26 to 30 cents a share in the fourth quarter of its fiscal year, below consensus of 40 cents. For the full year, the company cut its forecast to a range of $1.36 to $1.40 from its previously forecast range of $1.46 to $1.56.
Whitman expressed confidence that HPE will be more profitable in fiscal 2018, partly as a result of the HPE Next program announced in the quarter. It’s aimed at taking out up to $300 million in costs in the second half of this year by streamlining operations and the number of different product configurations that fit the smaller company. Neri leads that program.
Still, Whitman said headwinds such as higher memory-chip prices and intense competition in storage and servers aren’t going away soon. “We still see a very competitive environment particularly in the U.S.,” she said.
Judging from their reaction Friday to the entirely expected software spinoff, though, investors may have more fundamental concerns. “The selloff may also be a signal that the market is either losing patience with Whitman’s strategy or doubts the software sale will deliver the kinds of broader benefits HPE claims,” said Charles King, president and principal analyst at Pund-IT Inc., who noted that competitors are doing pretty well with similar software assets.
In any case, Whitman’s promise that a less fettered HPE can now focus on growth businesses will be put to the test — and it’s not obvious how well the company will execute.
“Like the other asset sales HPE has pursued, the software spinoff is mainly designed to strengthen the company’s margins by removing businesses that are either not performing as HPE hopes or costing more to run than HPE prefers,” King said. “In any case, the financial benefits gained are more of a balance sheet exercise than signs of muscular strategic vision.”
And that uncertain direction is the bottom line to investors, as Wednesday’s stock reversal signaled. “Significant revenue exposure to categories threatened by workload migration to public cloud platforms limits upside to earnings and cash flow estimates,” Morgan Stanley analyst Katy Huberty wrote in a note to clients. “We do not yet know the strategic direction the company plans to take the company in FY18 and beyond as legacy server and storage weakness continue to offset gains from more recent investments in HPC, hyper-converged, all flash and network security.”
Photo: HPE on Facebook
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