Hewlett Packard (HPE) Up 4.3% Since Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Hewlett Packard Enterprise Company HPE. Shares have added about 4.3% in that time frame, outperforming the market.

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

Hewlett Packard Q4 Earnings Top Estimates

Hewlett Packard reported modest fourth-quarter fiscal 2017 results, wherein the bottom line surpassed the Zacks Consensus Estimate by a penny while the top line missed the same.

The company’s non-GAAP net earnings from continuing operations of 29 cents per share beat the Zacks Consensus Estimate of 28 cents and also came toward the higher end of management’s guidance range of 26-30 cents. Further, the figure jumped 26.1% on a year-over-year basis.

On a GAAP basis, the company reported earnings of 23 cents from continuing operations, compared with 19 cents reported in the year-ago quarter. Moreover, it compared favorably with the guided range of a breakeven to earnings of 4 cents.

The better-than-expected bottom-line performance was primarily owing to cost savings, lower tax rate, favorable other income and expense as well as transactions in connection with Software-spin merger.

Notably, during second-quarter fiscal 2017, the company closed the spin-merger of its Enterprise Services business. Consequently, Hewlett Packard considers Enterprise Services as a discontinued operation since the fiscal second quarter, and the year-ago quarter’s results have also been adjusted accordingly.

Additionally, the company completed the pending spin-merger of its Software business in the fiscal third quarter. Per the company, this quarter “represents adjustment to net periodic pension cost resulting from remeasurements of the Hewlett Packard Enterprise pension plans in connection with the spin-off of the software business, Seattle SpinCo, Inc., and the merger of Seattle SpinCo, Inc. with Micro Focus International plc and the spin-off of the enterprise services business, Everett SpinCo, Inc., and the merger of Everett SpinCo, Inc. with Computer Sciences Corporation.”

Before diving into the quarter’s details, it is to be noted that the company in its separate press release announced that its current CEO Meg Whitman will step down, but will remain on the HPE Board of Directors. Effective from Feb 1, 2018, current President Antonio Neri will become president and CEO of the company.

Quarter in Detail

Revenues

Hewlett Packard Enterprise reported revenues from continuing operations (which includes Enterprise Group and Financial Services) of $7.660 billion, up 4.6% from the year-earlier quarter’s revenues of $7.324 billion. However, quarterly revenues missed the Zacks Consensus Estimate of $7.714 billion.

Adjusted for currency exchange rates and divestures, the company’s revenues from continuing operations were up 11% year over year.

During the quarter, Hewlett Packard Enterprise’s performance in the Americas stayed constant mainly due to steady core compute and higher networking which was offset to some extent by softer organic storage results. Revenues in Europe grew mid-single digit driven by higher networking and growth in Germany, France and Iberia. Asia-Pacific witnessed strong core server sales, with growth in Japan, Australia, India and China.

Segment wise, revenues at the Enterprise Group was almost flat from the year-ago quarter to $6.852 billion. Adjusting for divestures and currency, segment revenues were up 1% year over year. Revenues from Servers were down 5%, Storage, Networking and Technology Services were up 5%, 21% and 2%, respectively.

Financial Services revenues were up 24% to $1.010 Billion. The segment’s net portfolio grew 1%, but financing volume was flat year over year.

Operating Results

Hewlett Packard Enterprise’s gross margin contracted 210 basis points (bps) on a year-over-year basis to 29.7%. This year-over-year contraction was mainly due to competitive pricing, elevated DRAM pricing and unfavorable currency.

Moreover, the company’s non-GAAP operating margin descended 100 bps to 8.2%, primarily due to a lower gross margin, which was partially offset by a decline in non-GAAP operating expenses as a percentage of revenues.

Fiscal 2017 Highlights

Hewlett Packard Enterprise reported revenues for fiscal 2017 from continuing operations of $28.871 billion, down 4.7% year over year.

The company’s non-GAAP net earnings from continuing operations of 96 cents per share lagged management’s guidance range of $1.36-$1.40. Moreover, the figure decreased 11.9% on a year-over-year basis.

Balance Sheet and Cash Flow

Hewlett Packard Enterprise ended the fiscal fourth quarter with $9.6 billion in cash and cash equivalents, up from $7.8 billion recorded at the end of the previous quarter. Long-term debt at the quarter end was $10.182 billion compared with $14.527 billion recorded in the last quarter.

During the quarter, Hewlett Packard Enterprise generated $826 million of cash flow from operational activities. Free cash flow was $370 million. For the 12 months ended of Oct 31, 2017, the company generated $889 million of cash flow for operational activities.

Additionally, during the reported quarter, the company returned $725 million to shareholders, of which $620 million was through share repurchases and the remaining through dividend payments. For fiscal 2017, Hewlett Packard Enterprise returned $3 billion to shareholders, of which $2.556 billion was through share repurchases and the remaining through dividend payments.

Guidance

The company issued a disappointing bottom-line guidance for first-quarter fiscal 2018.

Hewlett Packard Enterprise expects non-GAAP earnings per share in the range of 20-24 cents (mid-point: 22 cents), which is lower than the Zacks Consensus Estimate of 27 cents. On a GAAP basis, the company guides the bottom line to be in a range of 1-5 cents.

The company also provided outlook for fiscal 2018. Hewlett Packard Enterprise expects non-GAAP earnings per share for fiscal 2018 in the range of $1.15-$1.25 (mid-point $1.2). The Zacks Consensus Estimate is pegged at $1.17. On a GAAP basis, the company projects the bottom line to be in the range of 43-53 cents.

Hewlett Packard Enterprise estimates reported free cash flow to be $1 billion in fiscal 2018. The company also expects to return $2.5 billion to shareholders in fiscal 2018, of which $2 billion was through share repurchases and the remaining through dividend payments.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last month as none of them issued any earnings estimate revisions.

VGM Scores

Currently, Hewlett Packard Enterprise's stock has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

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

Our style scores indicate that the stock is more suitable for value investors than growth investors.

Outlook

Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.

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