Hewlett Packard (HPE) Soars on Q2 Earnings Beat, Strong Guidance
Hewlett Packard Enterprise Company HPE shares rose 15.3% during Tuesday’s extended trading session after the global edge-to-cloud company reported better-than-expected results for the second quarter of fiscal 2024. HPE’s upbeat guidance for the third quarter and full-fiscal 2024 on rapidly growing sales of servers built to handle artificial intelligence (AI) work also boosted investors’ confidence in the stock’s near-term prospects.
Hewlett Packard reported non-GAAP earnings of 42 cents per share for the second quarter, which beat the Zacks Consensus Estimate by 10.5%. The bottom line came above management’s guidance range of 36-41 cents per share. The better-than-expected bottom-line performance was primarily driven by stronger-than-expected sales growth and the benefits of disciplined operating cost management.
However, the reported non-GAAP earnings figure was 19% lower than the year-ago quarter and down 13% sequentially. The decline can primarily be attributed to the higher cost of sales, higher taxes and an increased number of shares outstanding, which more than offset the benefits of higher revenues.
HPE shares have demonstrated decent performance so far this year. The stock has rallied 16.5% year to date (YTD) against a 0.9% decline registered by Zacks Computer – Integrated Systems industry.
Hewlett Packard Enterprise Company Price and Consensus
Hewlett Packard Enterprise Company price-consensus-chart | Hewlett Packard Enterprise Company Quote
Top-Line Performance
Hewlett Packard’s second-quarter revenues of $7.2 billion increased 3% from the prior-year quarter and 7% sequentially, mainly driven by the strong performance of its server business unit. The top line surpassed the Zacks Consensus Estimate of $6.81 billion and came above management’s guidance range of $6.6-$7 billion. In constant currency, second-quarter revenues increased 4%. The annualized revenue run rate during the quarter was up 37% year over year to $1.5 billion.
Hewlett Packard’s server segment sales soared 18% (up 18% at cc) year over year and 15% sequentially to $3.87 billion, mainly driven by strong demand for its AI servers as well as traditional server systems. The AI system product revenues more than doubled sequentially to more than $900 million in the reported quarter. HPE’s CEO Antonio Neri stated that increased demand, along with better availability of NVIDIA’s high-powered semiconductors, led to a robust surge in AI server sales.
However, the division reported an operating profit margin of 11%, down 340 basis points (bps) from the year-ago quarter and 40 bps from the previous quarter. The decline could be attributed to aggressive pricing in the server market.
Revenues in the Intelligent Edge division plunged 19% (down 19% at cc) year over year and 9% sequentially to $1.09 billion during the quarter. The decline reflects strong backlog consumption during the year-ago and previous quarters, leading to difficult comparisons. Hewlett Packard stated that the demand environment across the segment remained soft.
The division’s operating profit margin of 21.8% contracted 290 basis points (bps) from the year-ago quarter and 760 bps sequentially. HPE noted lower revenues, a reduced mix of switching businesses and lower revenues from the backlog as the main reasons behind the decline in this division’s operating margin.
In the first quarter of fiscal 2024, HPE restructured its business by introducing the hybrid cloud business, which comprises storage and part of the server business that accounts for HPE GreenLake as well. The hybrid cloud division’s sales declined 8% (down 9% at cc) year over year but increased 1% sequentially to $1.26 billion. The sequential growth reflects cross-selling benefits from the integration of a majority of the HPE GreenLake offering into a single business unit.
The division reported an operating profit margin of 0.8%, which declined 110 bps from the year-ago quarter and 300 bps sequentially. Reduced revenue scale and an unfavorable mix of third-party products and traditional storage mainly led to a sequential decline in the operating margin.
The Financial service segment’s revenues of $867 million increased 1% (up 1% in cc) year over year but declined 1% sequentially. The segment’s operating margin of 9.3% expanded 40 bps year over year and improved 80 bps sequentially. Net portfolio assets of $13.2 billion decreased 1.1% year over year (up 0.3% in cc).
Corporate Investments & Other revenues were $252 million, up 4% year over year and 6% sequentially.
Operating Results
The non-GAAP gross profit came at $2.38 billion, down 6% year over year and 3% sequentially. The non-GAAP gross margin contracted 310 bps on a year-over-year and quarter-on-quarter basis to 33.1%. The contraction in the gross margin was primarily driven by a mix shift from high-margin Intelligent Edge revenues to Server revenues, along with an unfavorable mix within the hybrid cloud.
Hewlett Packard’s non-GAAP operating profit declined 14% year over year and 12% sequentially to $684 million. The non-GAAP operating margin contracted 200 bps year over year as well as sequentially to 9.5%. The negative impact of the lower gross margin was partially offset by disciplined operating expense management. Second-quarter non-GAAP operating expenses declined 1.6% year over year.
Balance Sheet and Cash Flow
Hewlett Packard ended the second quarter with $2.68 billion in cash and cash equivalents compared with $3.76 billion at the end of the previous quarter.
In the fiscal second quarter, HPE generated operating cash flow and free cash flow of $1.09 billion and $610 million, respectively. In the first half of fiscal 2024, it generated operating cash flow and free cash flow of $1.16 billion and $128 million, respectively.
HPE returned $386 million to shareholders in the first half of fiscal 2024 through dividends and share repurchases.
Guidance Update
Hewlett Packard initiated guidance for the third quarter and updated the outlook for fiscal 2024. The company forecasts to generate revenues between $7.4 billion and $7.8 billion in the fiscal third quarter. The company estimates GAAP and non-GAAP diluted net earnings per share (EPS) in the range of 29-34 cents and 43-48 cents, respectively. The Zacks Consensus Estimate for third-quarter revenue and non-GAAP earnings is pegged at $7.42 billion and 46 cents per share, respectively.
For fiscal 2024, HPE revised revenue and non-GAAP EPS guidance. HPE updated the company’s revenue growth to 1-3% from the previous guidance of 0-2% at cc. The company also revised upward its non-GAAP EPS guidance in the range of $1.85-$1.95 from the previous guidance of $1.82-$1.92. However, HPE lowered the GAAP EPS forecast to the $1.61-$1.71 band from the $1.81-$1.91 range projected earlier. The consensus mark for fiscal 2024 revenue and non-GAAP earnings is pegged at $29.09 billion and $1.88 per share, respectively.
For fiscal 2024, HPE now anticipates operating profit growth on a GAAP and non-GAAP basis in the range of 2-6% and 0-2%, respectively. It continues to expect free cash flow to be at least $1.9 billion in fiscal 2024.
Zacks Rank & Stocks to Consider
Hewlett Packard currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader technology sector are Dropbox DBX, Tyler Technologies TYL and Datadog DDOG, each sporting a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.
The consensus mark for Dropbox’s 2024 earnings has moved north 11 cents to $2.12 per share over the past 30 days, which indicates a 7.1% increase from the 2023 level. It has a long-term earnings growth rate of 11.4%. The DBX stock has plunged 26.4% in the YTD period.
The Zacks Consensus Estimate for Tyler Technologies’ 2024 earnings has moved north 4 cents to $9.19 per share in the past 30 days, which implies year-over-year growth of 17.8%. It has a long-term earnings growth rate of 15%. The TYL stock has risen 14.4% YTD.
The Zacks Consensus Estimate for Datadog’s 2024 earnings has moved north 12 cents to $1.54 per share in the past 30 days, which calls for an increase of 16.7% on a year-over-year basis. The company has a long-term earnings growth rate of 9.6%. DDOG’s shares have dropped 10.4% YTD.
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