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Why Is HP Enterprise (HPE) Down 11.4% Since Last Earnings Report?

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A month has gone by since the last earnings report for Hewlett Packard Enterprise (HPE). Shares have lost about 11.4% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Hewlett Packard Q2 Earnings & Revenues Miss Estimates

Hewlett Packard Enterprise Company reported second-quarter fiscal 2022 non-GAAP earnings of 44 cents per share, which missed the Zacks Consensus Estimate by 2.2% but was within management’s guidance of 41-49 cents. The reported figure was two cents below the year-ago quarter’s earnings of 46 cents per share.

Revenues of $6.7 billion increased 0.2% from the prior-year quarter but lagged the consensus mark of $6.83 billion. Annualized revenue run-rate (“ARR”) was up 25% year over year to $829 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. However, supply-chain constraints hurt its sales growth.

Quarterly Details

Segment-wise, High-Performance Compute & Artificial Intelligence (“HPC & AI”) revenues increased 4% year over year to $710 million. The company revealed that the ongoing component-supply constraints, coupled with a delayed response from customers, affected the division’s sales growth.

The Compute division’s sales remained flat year on year at $3 billion. The division witnessed 270 basis points (bps) operating profit margin expansion to 13.9%, driven by strategic pricing actions that offset inflated input costs.

Revenues in the Intelligent Edge division rose 8% year over year to $867 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 50%.

Financial Service revenues were down 2% year over year to $823 million. Net portfolio assets dipped 4% to roughly $12.6 billion.

Revenues from the Storage business were down 3% year over year to $1.1 billion, primarily on account of supply chain disruptions in HPE IP solutions.

Corporate Investments & Other revenues stood at $327 million, down 6.6% year over year.

Operating Results

Non-GAAP gross margin of 34.2% contracted 10 bps on a year-over-year basis while expanding 30 bps sequentially. The year-over-year decrease in gross margin was mainly due to proportionally higher Personal Systems mix and higher costs, including commodities, which was partially offset by a strong pricing discipline.

Hewlett Packard’s non-GAAP operating profit margin decreased 90 bps year over year to 9.3% and 170 bps sequentially. The company continued to save from the cost optimization plan and invest in high growth, margin-rich portfolios in the second quarter of fiscal 2022.

Balance Sheet and Cash Flow

Hewlett Packard ended the fiscal second quarter with $3.03 billion in cash and cash equivalents compared with $3.86 billion at the end of the previous quarter.

During the fiscal second quarter, Hewlett Packard generated $379 million of cash for operational activities and a negative free cash flow of $211 million. Free cash flow reflected normal seasonality and certain inventory actions undertaken to keep pace with the growing demand of customers.

During the first six months of fiscal 2022, the company generated $303 million of cash for operational activities and a negative free cash flow of $788 million.

Hewlett Packard returned $214 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 Jul 8, 2022, to shareholders of record as of Jun 13, 2022.

Guidance

Hewlett Packard revised guidance for fiscal 2022 non-GAAP earnings. The company now predicts the figure in the range of $1.96-$2.10 per share compared with the previously guided range of $2.03-$2.17 per share.

However, HPE still anticipates free cash flow in the band of $1.8 billion to $2 billion.

For the third quarter of fiscal 2022, Hewlett Packard expects non-GAAP earnings between 44 cents and 54 cents per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

The consensus estimate has shifted -17.48% due to these changes.

VGM Scores

Currently, HP Enterprise has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. 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. It's no surprise HP Enterprise has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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