HPE Outlook for Trade Tension Damps Optimism on Profit Forecast

(Bloomberg) -- Hewlett Packard Enterprise Co., a maker of server computers, raised its profit forecast for the year on deeper cost-cutting measures, but lingering trade worries tempered investor optimism.

Profit, excluding some items, will be $1.62 a share to $1.72 a share in fiscal 2019, an increase of 6 cents per share from the company’s guidance announced in February. Analysts, on average, projected $1.64.

Shares, which had jumped almost 5% in extended trading on the forecast, gave back all of the gains when executives said on a conference call that the trade war between the U.S. and China had caused uncertainty for the company. The stock closed at $14.34 in New York and has climbed 8.6% this year.

Chief Executive Officer Antonio Neri is trying to make the company a key hardware vendor for big-data needs, seeking to take advantage of technology trends from artificial intelligence to the internet of things. HPE said last week it would acquire Cray Inc., which makes high-performance computers used to process vast amounts of information, in a deal valued at $1.4 billion. What may prove more consequential is the U.S.-China trade war, which threatens to curb HPE’s revenue and raise some component costs.

Sales fell 4.3% from a year earlier to $7.15 billion in the fiscal second quarter, which ended April 30, the San Jose, California-based company said Thursday in a statement. Analysts projected $7.4 billion, according to data compiled by Bloomberg. Adjusted profit was 42 cents a share compared with analysts’ average estimate of 36 cents.

HPE’s sales have contracted on a year-over-year basis every quarter but one since 2017, and Neri has been keen to reverse that trend -- betting $4 billion on edge computing, which lets clients process information on hardware far away from centralized data centers.

The company’s “performance reflects our continued progress on shifting our portfolio to higher-margin products and services, to deliver positive and consistent earnings growth,” Neri said on a conference call with analysts.

The U.S.-China trade war is creating “uncertainty” for the hardware maker, which reported declining revenue from China in the quarter, executives said during the call. HPE generates revenue and profit from a joint venture in China that sells its products, H3C Technologies. Tsinghua Holdings owns 51% of the company. The joint venture underperformed expectations in the quarter, HPE executives said. The company is selling fewer products to H3C, which is offering more China-developed hardware for “profitable growth.”

While HPE has an option to sell its stake in H3C in the next three years, Neri said the company plans to hold on to the investment because it’s strategic and a valuable source of revenue.

“We’re very satisfied with our presence there,” Neri said in an interview. He doesn’t see the Trump administration’s crackdown on companies doing business with China affecting the joint venture because HPE is not sharing intellectual property with H3C, he said.

HPE may have to pay more for some assembly costs as well as minor components that come from China, such as batteries and electronics, said Anand Srinivasan, a Bloomberg Intelligence analyst. HPE builds products for the Asia-Pacific region in China, but also manufactures in the U.S., Mexico and Europe.

The hardware company has had “execution issues” in North America while selling its Aruba networking devices, which include Wi-Fi routers and switches. Aruba product revenue fell 8% in the quarter compared with a year earlier. Neri said the company was reorganizing the way it sold to different tiers of clients, which has delayed some purchases.

To contact the reporter on this story: Nico Grant in San Francisco at ngrant20@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack

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