HP Enterprise (HPE) Down 9.7% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Hewlett Packard Enterprise (HPE). Shares have lost about 9.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is HP Enterprise due for a breakout? Before we dive into how investors and analysts have reacted as 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 Q3 Earnings Match, Revenues Top Estimates

Hewlett Packard Enterprise reported third-quarter fiscal 2022 non-GAAP earnings of 48 cents per share, which matched the Zacks Consensus Estimate and was a penny higher than the year-ago quarter’s earnings of 47 cents per share.

Revenues of $7 billion increased 1% from the prior-year quarter and surpassed the consensus mark of $6.97 billion. Annualized revenue run-rate (“ARR”) was up 22% year over year to $858 million.

Hewlett Packard continued to witness increased demand for its products and services during the quarter, primarily driven by the accelerated digital transformation amid the remote working trend. Despite supply-chain constraints and high inflationary pressure, the company witnessed an increase in both earnings and sales growth.

Quarterly Details

Segment-wise, High-Performance Compute & Artificial Intelligence (“HPC & AI”) revenues increased 12% year over year to $830 million. The company stated that this segment’s market share has expanded 39% at the end of the quarter.

The Compute division’s sales decreased 3% year over year to $3 billion. The division witnessed 210 basis points (bps) operating profit margin expansion to 13.3%, driven by strategic pricing actions that offset inflated input costs.

Revenues in the Intelligent Edge division rose 8% year over year to $941 million during the quarter, primarily driven by strong customer demand. Revenues from both Aruba Services witnessed double-digit growth while Intelligent Edge as-a-Service saw an improvement of over 60%.

Financial Service revenues were down 3% year over year to $817 million. Net portfolio assets dipped 4% to roughly $12.6 billion.

Revenues from the Storage business were down 2% year over year to $1.2 billion, primarily on account of supply chain disruptions in HPE IP solutions.

Corporate Investments & Other revenues stood at $300 million, down 9.6% year over year.

Operating Results

Non-GAAP gross margin of 34.7% remained flat on a year-over-year basis while expanding 50 bps sequentially. The year-over-year increase in gross margin was mainly driven by a strong pricing discipline and a continued mix shift toward higher-margin software-rich offerings.

Hewlett Packard’s non-GAAP operating profit margin increased 70 bps year over year to 10.5% and 120 bps sequentially. The company continued to save from the cost optimization plan and invest in high-growth, margin-rich portfolios in the third quarter of fiscal 2022.

Balance Sheet and Cash Flow

Hewlett Packard ended the fiscal third quarter with $3.76 billion in cash and cash equivalents compared with $3.03 billion at the end of the previous quarter.

During the fiscal third quarter, Hewlett Packard generated $1.3 billion of cash for operational activities and a free cash flow of $587 million. Free cash flow reflected normal seasonality and certain inventory actions undertaken to keep pace with the growing demand of customers.

During the first nine months of fiscal 2022, the company generated $1.56 billion of cash for operational activities and a negative free cash flow of $201 million.

Hewlett Packard returned $353 million to shareholders through share repurchases and dividends in the reported quarter. The company declared a regular cash dividend of 12 cents per share, payable on Oct 7, 2022.

Guidance

Hewlett Packard revised guidance for fiscal 2022 non-GAAP earnings. The company now predicts the figure in the range of $1.96-$2.04 per share compared with the previously guided range of $1.96-$2.10 per share.

Further, HPE currently anticipates free cash flow in the band of $1.7-$1.9 billion, down from the prior estimated band of $1.8-$2 billion.

For the fourth quarter of fiscal 2022, Hewlett Packard expects non-GAAP earnings between 52 cents and 60 cents per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, HP Enterprise has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, 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 B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, HP Enterprise has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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